Chasing Committees The Ethics of Entertainment Solicitation

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Oct 2003

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Dinner parties, cocktail receptions, breakfast and lunch presentations, seminars, telephone calls, brochures and letters (including free legal analyses and advice): These are
some of the "techniques" being used in the very competitive arena
of seeking employment as counsel to an official committee of unsecured
creditors in large chapter 11 cases. Are they ethically appropriate?

Though there are many ways in which clients choose
lawyers, and many ways in which lawyers court potential clients, there is
probably nothing in the annals of lawyer engagements quite like the process
that attends the formation of a chapter 11 creditors' committee and its
selection of counsel. There is no "client" until the committee is
chosen, usually at an organizational meeting convened by the U.S. Trustee on
relatively short notice. In the brief time between case commencement and the
organizational meeting, potential committee members are identifiable from the
published list of 20 creditors holding the largest unsecured claims, but it is
impossible to know how many of them will wish to serve or ultimately be chosen.
Once formed, in most cases the committee determines what lawyers to interview,
conducts a "beauty contest" among them, and makes its decision.

Unless all solicitation is prohibited (and it is not), this process requires solicitation in advance from persons who are not yet
committee members. Even a lawyer who simply shows up at an organizational
meeting hoping to be interviewed by a committee must "work the
room" of potential committee members to have any possibility of being
invited to interview.<a href="#2" name="2a">2</a> The question then is: What are the boundaries? What
solicitation/advertising is allowed under the codes of professional conduct in
this unique chapter 11 context, and what is not? Can you take prospective
committee members to dinner the evening before the organizational meeting?

The
basic solicitation rules of the Model Rules of Professional Conduct generally
permit written solicitation (so long as it is not misleading) and appear to
prohibit in-person or telephone solicitations in most cases. See Model Rule of Professional Conduct (Model Rule) Rule 7.3 (2003).<a href="#3" name="3a">3</a> If these
rules apply to the list of solicitation techniques set forth at the beginning
of this article, it would appear that almost all of them violate the
disciplinary rules. Model Rule 7.3 provides that "[a] lawyer shall not by
in-person, live telephone or real-time electronic contact solicit professional
employment from a prospective client when a significant motive for the
lawyer's doing so is the lawyer's pecuniary gain." However,
an important exception to this rule provides that such solicitation is
acceptable when the person contacted "has a family, close personal or
prior professional relationship with the lawyer."<a href="#4" name="4a">4</a> Model Rule 7.3(a)(2).

If Model Rule 7.3 is literally applied, then a lawyer could determine who among
the top 20 creditors is a client or former client, and could phone, e-mail or
visit with any such creditors to make clear that the lawyer wishes to be
engaged as committee counsel, but could not phone, e-mail or visit any of the
other creditors on the list. Again, using literal application, the lawyer could
nevertheless write (non-electronically) to creditors who are not clients or
former clients, and make known the same desires. Model Rule 7.1 permits written
solicitation so long as the communication does not "contain...a material
misrepresentation of fact or law, or omit...a fact necessary to make the
statement considered as a whole not materially misleading."<a href="#5" name="5a">5</a>

Does anyone actually observe this written/non-written solicitation distinction in
practice? Should it matter? An argument against literal application of the
rules is that the lawyer is seeking employment from the as-yet-unformed
committee, and not therefore from any of the creditors from whom he or she is
soliciting. Model Rule 7.3(a) prohibits solicitation of "professional
employment from a prospective client."
However, where as here, the purpose of the solicitation is in fact employment
from a prospective client, and the person being solicited is being solicited
precisely because of the expectation that that person will have a role in
making the employment decision, a distinction based on a literalist reading of
the rule would appear to be evasive.

Another argument relies on a distinction between advertising availability to serve as
counsel, and actually soliciting the employment. The client does not exist, and
the lawyer is merely letting potential members of the committee know that he or
she would like to be considered for employment should such members be selected
when the committee is formed. This distinction is not persuasive either, and
appears to evade the letter and spirit of the relevant rule. If you inform
someone of your availability and ask to be considered for employment, you are
soliciting employment within the plain meaning of the rule. Under the rules,
you can do this in writing, but you cannot do it in person, electronically or
by telephone with anyone who is not a current or former client.

So where does this leave the dinner parties, receptions, seminars and other in-person
solicitation techniques identified at the outset of the article (which can be
characterized as "entertainment solicitations")? Can you even
"work the room" during the organizational meeting if you cannot
inform non-clients of your availability and desire to serve?

In entertainment solicitations, which are increasingly employed by lawyers in the
large chapter 11 case environment, the top 20 creditors are typically invited
to a private meal, reception or seminar by the lawyer seeking employment. The
ostensible purpose of these functions, usually held on the eve or day of the
organizational meeting, is to provide to the prospective committee members free
insights to the issues they will have to address, and otherwise give them
something to do if they have had to travel to the meeting from out of town. The
lawyer seeking employment as committee counsel gets a captive audience, and
while wining and dining the participants at the lawyer's expense has an excellent opportunity to bond with them,
significantly increasing his or her chances of not only being invited to
interview as committee counsel, but being selected. In some cases, these
"events" create enough "good will" to assure the lawyer
of employment without having to run the gamut of the competitive interviewing
of a typical beauty contest.

In these entertainment solicitations, there is disciplinary guidance that goes
well beyond the simple distinction between clients and non-clients for purposes
of in-person solicitations. Model Rule 7.2(b) states that "[a] lawyer
shall not give anything of value to a person for recommending the
lawyer's legal services."<a href="#6" name="6a">6</a> If you buy dinner or drinks, or even
give free legal seminars or advice to a potential committee member for the
purpose of having that person recommend you for employment by the committee,
are you not in direct violation of Model Rule 7.2(b)?<a href="#7" name="7a">7</a>

What about "working the room?" Can any distinction be made? In
jurisdictions having adopted the Model Rules, probably not. Model Rule 7.3
forbids all in-person contact soliciting employment unless the person contacted
is a lawyer, family member, close personal friend or has a prior professional
relationship with the lawyer.<a href="#8" name="8a">8</a> Unless the parties in the room fall into one of
these categories, any attempt to solicit them would be a violation of the rule.

However, the same result may not necessarily ensue in the few jurisdictions still using
a variant of the Model Code. In New York, for example, the Code of Professional
Responsibility is divided into canons comprised of Ethical Considerations
(NYEC) and Disciplinary Rules. The Disciplinary Rules are mandatory; the
Ethical Considerations aspirational. The above-quoted disciplinary rules are
part of Canon 2, and NYEC 2-8 thereunder provides that "[s]election of a
lawyer should be made on an informed basis. Disclosure of truthful and relevant
information about lawyers and their areas of practice should assist in the
making of an informed selection." NYDR 2-104 permits lawyers to engage in
a variety of communications designed to suggest to potential clients that they
need particular legal assistance. Then there are the advertising rules, also
part of Canon 2. Publicity and advertising are permitted so long as they are
not misleading. Indeed, NYDR 2-101(D) provides that "[a]dvertising and
publicity shall

be designed to educate the public to an awareness of legal
needs and to provide information relevant to the selection of the most
appropriate counsel." How can you advertise to prospective committee
members that they should hire counsel and provide your qualifications to show
that you are the most appropriate, as required by NYDR 2-101(D), without
violating the disciplinary rule proscribing in-person solicitations?<a href="#9" name="9a">9</a>

<blockquote><blockquote>
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<big><center>
In the competitive environment that exists today, the boundaries of solicitation have clearly been challenged.
</center></big>
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</blockquote></blockquote>

Herein lies a gap in the guidance. It would appear that the New York rules assume that
advertising and publicity would involve only published information. Written
solicitation is permitted, as discussed above, so there would be no apparent
conflict. If you have a room full of potential committee members,
shouldn't you be able to advertise your qualifications and availability
to them, as you would in a written solicitation, regardless of whether they are
clients or not? If you regard the room as the relevant "public,"
and a public that in particular needs specialized counsel and needs to be
informed in accordance with the relevant ethical considerations in order to
make the best selection, it is difficult to consider "working the
room" to be proscribed by any disciplinary rule. By the same logic, one
ought to be able to make telephone calls and pay visits upon the top 20
creditors, whether they are clients or not, in order to educate them to the
need for bankruptcy counsel if they become committee members, and to provide
your qualifications to serve in that position.

Of course, neither "working the room" nor educating the top 20 by
phone or otherwise entails the furnishing by the lawyer of value to the creditors
in order to induce them to recommend the lawyer. Though there is clearly
overhead attributable to "pitch books" and the type of free legal
advice that attends the generalized solicitation from the top 20 creditors, or
even a seminar that does not include food and drink, these are indirect (like
advertising) costs that serve only to amplify the lawyer's qualifications
to serve. One can argue therefore that they are more consistent with the
ethical consideration to educate and the rule guidance, which permits
solicitations and advertising. The same cannot be said of the money that is
spent to cover the costs of drinks and meals, a much more direct benefit to the
party being solicited.

In the competitive environment that exists today, the boundaries of solicitation
have clearly been challenged. Permissible written solicitations and telephone
calls (arguably borderline where non-clients are concerned) remain the most
common techniques. But entertainment techniques are on the rise, in large part
because they are so successful. The more they succeed, the more pressure there
is on lawyers to use them to compete. However, so long as the lawyers
themselves are paying the costs of these entertainments, they appear to be
clearly out of bounds under the disciplinary rules. And if the bankruptcy case
is filed in a jurisdiction that follows the Model Rules, as do the majority of
states, then even "working the room" is probably forbidden.

What are the consequences of these violations? Is anyone really going to cease working
the room at an organizational meeting? Will lawyers cease entertainment
solicitations because they violate the disciplinary rules? Here's where
it gets really amusing. This is about trees falling in forests. Model Rule 8.3
requires a lawyer who knows that another lawyer has committed a violation of
the Model Rules "that raises a substantial question as to that
lawyer's honesty, trustworthiness or fitness as a lawyer in other respects" to "inform the
appropriate professional authority." Model Rule 8.3 (emphasis
supplied).<a href="#10" name="10a">10</a>

It is a bit of a stretch to suggest that an entertainment solicitation raises a
"substantial question," if any question at all, about the
lawyer's honesty, trustworthiness or fitness as a lawyer. The way the
rules are drafted, one cannot take the position that a knowing violation of a
disciplinary rule by definition implicates the lawyer's honesty,
trustworthiness or fitness, or else that qualification would not have been
placed upon the duty to report. Some of the lawyers engaged in entertainment
solicitations are, in fact, some of the nation's finest lawyers. While
lawyers who observe the disciplinary rules might not like the advantage that
non-observant lawyers get from the entertainment solicitation, and can fume
all they want about how it is prohibited by mandatory disciplinary rules, both
the Model Rules and the Model Code make it clear that there is no requirement
to report the conduct unless it reflects on the lawyer's basic fitness.

Of course one can report the conduct whether reporting is required or not, leading
to an ethical question of a different sort. The conduct appears to affect only
the competition for employment. There is no evidence that potential clients are
being misled by it. Can you use the disciplinary rules to level the competitive
playing field? Although the U.S. Trustee often serves in an ethics oversight
capacity for professional engagement, there does not appear to be any ethics
"police" for committee solicitations.

Is it unethical to exceed the speed limit if there are no police around? In the
movie "City Slickers," one character asks Billy Crystal's
character whether he would have an extramarital affair if it was absolutely
guaranteed that no one would ever find out about it. The questioner makes clear
that he would do so. But Billy Crystal's character says he would not,
because it would still be wrong, and he would know it.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> This article expresses the
author's opinions, and his views should not be attributed to either his
firm or the American Bankruptcy Institute. The author is grateful to Paul
Gunther, an associate with the New York office of Mayer, Brown, Rowe & Maw
LLP, for his valuable research assistance. <a href="#1a">Return to article</a>

<a name="2">2</a> Can a lawyer be chosen as a
committee counsel without any solicitation activity whatsoever? In some cases,
the U.S. Trustee selects committees without organizational meetings, and the
committee members confer and decide who to invite to interview. In some of
those cases, it is possible that lawyers are invited to interview without
having sought the opportunity in advance. It is also conceivable in a rare case
that a committee formed at an organizational meeting extends an invitation to
such a lawyer of national repute who has not sought the engagement. In
practice, however, in virtually every case of significant size, the committee
makes its selection from among the lawyers who appear at the committee's
organizational meeting. <a href="#2a">Return to article</a>

<a name="3">3</a> The overwhelming majority of states
have adopted some variation of the Model Rules. Some jurisdictions, such as New
York, still rely on the older Model Code of Professional Responsibility (Model
Code). As will be shown, attorneys may enjoy greater freedom to conduct
in-person solicitations in jurisdictions having retained the Model Code than in
jurisdictions having adopted the Model Rules. <a href="#3a">Return to article</a>

<a name="4">4</a> New York Disciplinary Rule (NYDR)
2-103(A)(1) similarly states that "[a] lawyer shall not solicit
professional employment from a prospective client...[b]y in-person or telephone
contact," although such solicitation may be conducted where sought from a
"former client or current client." See New York Code of Professional Responsibility,
Disciplinary Rule 2-103(A)(1) (2003). <a href="#4a">Return to article</a>

<a name="5">5</a> NYDR 2-103(A)(2) permits written
solicitation so long as it is not misleading, the party being contacted has not
made known that it does not wish to be solicited, it is free of coercion, the
recipient is physically, emotionally and mentally capable of making the
engagement decision, and it is not being made on behalf of another firm. <a href="#5a">Return to article</a>

<a name="6">6</a> In New York, the analogous
provision is NYDR 2-103(B), which provides that "[a] lawyer shall not
compensate or give anything of value to a person or organization to recommend
or obtain employment by a client, or as a reward for having made a
recommendation resulting in employment by a client...." <a href="#6a">Return to article</a>

<a name="7">7</a> During the interviews themselves,
it is common for lawyers to provide free legal advice on the issues at hand in
order to persuade the committee members that they are capable for the
engagement. Once invited to interview for the job, the lawyer probably cannot
be said to be soliciting employment. <a href="#7a">Return to article</a>

<a name="8">8</a> The analogous provision in New York
is NYDR 2-103(A)(1). <a href="#8a">Return to article</a>

<a name="9">9</a> An article for another day may well
ask the interesting question of which state's ethics rules should apply
when soliciting creditor committee engagements. Should it be the state where
the case is pending? The state where the lawyer resides? The state where the
creditor resides? <a href="#9a">Return to article</a>

<a name="10">10</a> NYEC 1-4 provides (aspirationally, and
not mandatorily) that "[a] lawyer should reveal voluntarily to those
officials all knowledge...which the lawyer believes clearly to be a violation
of the Disciplinary Rules that raises a substantial question as to the other
lawyer's honesty, trustworthiness or fitness in other respects as a
lawyer." The relevant disciplinary rule on this issue, NYDR 1-103(A),
makes mandatory the reporting "to a tribunal or other authority empowered
to investigate or act upon such violation [of] knowledge...that raises a
substantial question as to another lawyer's honesty, trustworthiness or
fitness as a lawyer." <a href="#10a">Return to article</a>

Journal Authors

Michael P. Richman

Journal Date

Wednesday, October 1, 2003 - 12:00

Bankruptcy Rule

2003