I passed along to a group of lawyers the link to Stephanie Kimbro's post on Lawyerist, Offer Unbundled Legal Services to Compete in Today’s Legal Market. Someone responded to me, "But did you see that the 9th Circuit Bankruptcy Appellate Panel just sanctioned an attorney for failing to represent a client in an Adversary Proceeding even though the attorney's engagement agreement excluded adversary proceedings unless separately retained?" Since I knew that was common practice among the bankruptcy bar and many moons ago, I used to do that type of work, I decided to inquire further. The opinion is DeLuca v. Seare (In re: Seare), BAP No. NV-13-1196, August 25, 2014. (PDF of Opinion)
Seare is an interesting opinion and I am glad I didn't follow my first impulse to close the file when I saw it was a 53 page PDF. Neither the debtor nor the debtor's counsel is particularly bathed in glory in this opinion. The sanction ordering the attorney to "provide a copy of the Sanctions Opinion to potential adversary clients whose case he declines for the next two years" certainly carried a sting.
The question raised by the opinion is this (which does not reflect the facts of this rather complicated case): Is it appropriate for a lawyer to represent a debtor in Chapter 7 for a flat fee and require additional fees to defend an adversary proceeding when most of the debts may be determined to be non-dischargable if an adversary proceeding is filed? The answer depends on many factors, but the teaching of this opinion is that the client must be informed of the risks, and from the practice management point of view, the lawyer should be able to prove the client was so informed should there be a question later. I recall several times having clients sign documents that said in plain English that they wanted to file their case and understood that, if contested by the creditor, Debts A, B and C might not be discharged because of the underlying facts. Then it would cost more money to defend that proceeding and they could lose with their debt surviving.
The fact that the questioned debt in Seare was for sanctions for fraud by misrepresentations to a court and a previous lawyer just makes the situation more colorful.
Here is what the court had to say about unbundling in this situation:
Debtors needed DeLuca to inform them sufficiently of the risks associated with the St. Rose debt before they could properly provide informed consent to allow DeLuca to unbundle services. DeLuca failed to advise them about the debt or its risks because he did not perform even a minimal investigation, which would have revealed that the Judgment arose from fraud. Without that knowledge, it was impossible for DeLuca to determine Debtors’ circumstances and advise them as to what sort of representation would be needed to achieve their goal of eliminating the St. Rose debt and the garnishment.
Judge Jury filed a concurring opinion stressing that unbundled legal services are not a bad thing. He stated:
If done correctly, unbundling may be key to competent consumer bankruptcy attorneys providing much needed representation to debtors at an affordable price. Without the ability to unbundle adversaries, the flat fee which a consumer attorney would need to charge for basic bankruptcy representation might become prohibitive and exacerbate the already existing problem of pro se filings.
It would well serve any lawyer considering offering unbundled services to at least skip down and read the final three pages of the opinion where Judge Jury offers his suggestions for lawyers "to avoid violating ethical rules and the Bankruptcy Code when they limit the scope of representation of consumer debtors." Some may disagree with some parts of the steps, but we have to appreciate Judge Jury's effort to provide guidance.