It began with a letter to the judge from a chapter 7 debtor complaining that his lawyer was filing documents without his authorization and ended with an August 3 opinion by Bankruptcy Judge Sean H. Lane of Manhattan, where he railed against “the apparently widespread (and increasing) use of appearance counsel in chapter 7 cases.”
Judge Lane directed the debtor’s attorney to return the $900 fee.
The case was not “unusually difficult,” but “difficulties arose almost immediately,” Judge Lane said. At the first meeting of creditors under Section 341, the debtor told the panel trustee that his schedules contained incorrect information and that the “petition contained a version of his signature that did not match the signature he affixed to the petition and original schedules,” according to the judge.
The debtor’s attorney did not attend the original creditors’ meeting. Instead, the attorney sent a so-called appearance counsel who was not an employee at the debtor’s attorney’s firm and “was not at all familiar with the debtor’s case,” Judge Lane said. At the adjourned creditors’ meeting, the debtor’s attorney sent a different appearance counsel, who was unaware of “the issues relating to the debtor’s filings.”
Judge Lane said that the use of appearance counsel “effectively left the debtor without representation at his meeting of creditors.”
At the first creditors’ meeting, the debtor had said there were mistakes in his schedules. Among other things, the schedules said he had filed bankruptcy eight years earlier when he had not. The schedules listed student loans when there were none. At the second creditors’ meeting, the debtor said that his attorney had not amended the schedules correctly.
Judge Lane said that the case “highlights the perils of the use of appearance counsel,” who “often know little or nothing about the case.” He added that “debtors are usually unaware that an appearance counsel will be representing them.”
Judge Lane said that the debtor’s counsel violated several provisions in New York’s Rules of Professional Responsibility. Among other things, he referred to the requirement that a client must give informed consent to the scope of representation and that a supervising lawyer must ensure that the supervised lawyer conforms with the Professional Rules.
Applying Section 329(b), Judge Lane said he “easily” concluded that the attorney should be required to repay the $900 fee to the debtor, who had scrimped for eight months to pay the fee in installments before filing. (The disabled debtor was living on monthly income of less than $1,500.) Section 329(b) permits the court to compel repayment of a fee to the debtor if “such compensation exceeds the reasonable value of any such services . . . .”
In the case at hand, the chapter 7 panel trustee urged Judge Lane “to bar the use of appearance counsel in its entirety for 341 meetings.” The judge noted that several districts have local rules dealing with appearance counsel.
Judge Lane said that “the entire Court should first consider the wisdom of enacting a local rule to address these issues.” In the meantime, the judge said, “the Court will be exceedingly vigilant on this issue.” He encouraged the reporting of “any instances where a counsel is failing to meet his or her obligations to a debtor, including, but not limited to, failing to personally appear with the debtor at a 341 meeting.”
Ethical problems may remain for the debtor’s attorneys. In one footnote, Judge Lane observed that the appearance counsel had not filed statements under Section 329(a) and Bankruptcy Rule 2016(b) disclosing the compensation they were to receive. The debtor’s retained attorney had failed to disclose fee-sharing arrangements with the appearance counsel, as required by Section 329(a).
Although he did not make any findings on the issue, Judge Lane said in another footnote that counsel for the debtor may have filed documents without the signature or approval of the debtor. He cited cases for the proposition that affixing a client’s electronic signature, when unauthorized, is equivalent to forging the client’s signature.
The case also highlights a systemic shortcoming in consumer bankruptcy: It’s simply too expensive for many debtors. This debtor, living on $1,500 a month, needed eight months to pay the fee in installments. A fee of $900, in turn, may be inadequate for counsel to appear at multiple creditors’ meetings and cover the costs when problems arise.
Congress should consider creating an administrative agency to process bankruptcies at no cost for debtors living in the vicinity of the poverty line. (The foregoing is the opinion of this writer, not of the American Bankruptcy Institute.)