Ignorance of Ethical Guidelines Can Cost You Money

A cautionary tale in the failure to have written fee agreements and maintain good records of client interactions is evidenced in a recent court decision out of the U.S. Bankruptcy Court for the District of Massachusetts. All attorneys, not just the bankruptcy practitioner, should take a glance at the following case to be reminded of the seriousness of not abiding by practices upholding the highest degree of ethical standards.

The court in In re Thorpe held that the debtor’s civil attorney did not have a valid claim for attorneys’ fees due in part to the attorney’s unethical failure to disclose the debtor’s claim to the bankruptcy court, the attorney’s failure to have a written contingency fee agreement, and the attorney’s failure to maintain billing records. By not doing those things, the attorney lost out on fees of upwards of $100,000 from more than five years of intense litigation.

A short description of the facts would be helpful in analyzing this somewhat complex case of who knew what and when. The debtor filed for chapter 7 bankruptcy protection in 2008. The debtor’s bankruptcy petition listed all his assets, including a contingent claim for items taken after foreclosure with an estimated value of $5,000. No claim or lawsuit against the bank for foreclosure violations was listed in the original schedules or any amendments thereto. The case was subsequently discharged that same year, and no assets were distributed. The U.S. Trustee reopened the case in 2011 due to the debtor’s failure to list a claim against the foreclosing bank. The debtor’s civil attorney filed a proof of claim in the reopened chapter 7, citing more than $100,000 for legal services.

The debtor’s civil attorney practiced law through his separate-entity law firm and had a separate company that was engaged in acting as a real estate broker for real estate sales, development and consulting. The debtor’s civil attorney, acting as a representative through the real estate company, had an agreement with the debtor to do work related to the foreclosure proceeding. However, the law firm had no such agreement.

Conflicting testimony arose in the litigation resulting from the failure to disclose. The debtor stated that the civil attorney was told about the bankruptcy, but the debtor was told by the attorney to not get other attorneys involved so as to not complicate matters. The civil attorney even consulted with the Massachusetts Ethics Bar and was given the advice that “if your client fails to take steps you recommend to resolve the bankruptcy issues, then you may be required to make further disclosures yourself.”[1] Despite those recommendations, the civil attorney failed to adequately notify the bankruptcy court of the claim.

Not having a written contingency fee agreement leads to enormous ambiguity on who gets what upon settlement or ending of litigation. This leads to disagreements and potential further litigation to determine the breakdown of the monies received. Proceeding under the common law theory of quantum meruit is not an advisable best practice. As the court in this case referenced: “An attorney must establish a substantive contractual or quantum meruit basis to recover fees from the client as a predicate to filing a lien.”[2]

The key word is “substantive” when determining whether the attorney has a claim for fees. Whenever there are no written records, you presumably would need to backtrack to determine how much time you actually spent on the case. Given the amount of time that had passed since the litigation began, the attorney was not likely going to be able to accurately remember everything to produce strong substantive proof of the actual time spent on the matter. As this court noted, “the estimate of time spent, however, is grossly inflated and devoid of accuracy. It is an incredible reconstruction of time and worthless from an evidentiary standpoint.”[3]

The civil attorney’s testimony also evidenced ignorance of the Massachusetts Rules of Professional Conduct, which he in turn attempted to use as a defense for failing to notify the bankruptcy court. The ethical misconduct was a major factor in disallowing his claim for fees.

In summary, as a foundational practice tip: You must have written agreements in a contingency setting, and you must take all steps necessary to notify bankruptcy counsel and the bankruptcy court of any potential litigation in which you are involved as it relates to the debtor. Choosing not to do so, or a mistaken belief that you do not need to take these steps, leaves your claim for attorneys’ fees subject to being disallowed. Whenever you are unsure of an ethical issue, re-read the applicable rule of professional conduct and consult your state bar’s ethics board to obtain a better understanding of what actions you need to take.