Stupid Bankruptcy Lawyer Tricks - Vol. 1

Professor Eugene Volokh of The Volokh Conspiracy blog recently wrote here of a particularly noteworthy "stupid lawyer trick" in a case involving a lawyer recently charged with suborning perjury by advising his client to lie under oath in a DUI case. The "stupid trick" part of the lawyer's misconduct involved his documenting his advice to lie in emails to his client, one of which advised:

They won't have anyone there to testify how much you had to drink. You won't be charged with perjury. I've never seen them charge anyone with perjury, and everybody lies in criminal cases, including the cops. If you want to tell the truth, then we'll just plead guilty and you can get your jail time over with.

"Stupid lawyer tricks" are not uncommon in bankruptcy cases either, and Professor Volokh's post prompted me to start a new category called "Stupid Lawyer Tricks" in which I hope to periodically report on some of the "Jackass-type" tricks some bankruptcy lawyers try to get away with from time to time.

WARNING: THE FOLLOWING CASES FEATURE STUNTS PERFORMED BY PROFESSIONALS OR UNDER THE SUPERVISION OF PROFESSIONALS. THE BANKRUPTCY BLOG MUST INSIST THAT NO ONE ATTEMPT TO RECREATE ANY STUNT OR ACTIVITY REPORTED, OTHER THAN IN A SUPERVISED CLASSROOM SETTING.

This opening segment (vol. 1) of "Stupid Bankruptcy Lawyer Tricks" reports on some tricks found in the following recent cases, each of which is discussed below:

In re Sadorus, 2005 WL 3429467 (Bankr. C.D. Ill., 12/8/05) (advising a client to lie in order to get his bankruptcy case dismissed and thereby avoid having to disclose the existence of a bank account the lawyer had wrongly advised would be exempt)

In re Kollel Mateh Efraim, LLC, 2005 WL 3439684 (Bankr. S.D.N.Y., 12/15/05) (entering into a settlement on the record, but first not telling the client and then evading the client's attempts to find out what happened)

I.G. Petroleum, L.L.C., v. Fenasci (In re West Delta Oil Co.), 2005 WL 3220291 (5th Cir, 12/1/05) (lawyer retained as special counsel joins with a possible suitor for the debtor's assets, sends threatening letters to other potential bidders, and never discloses its conflict to the court)

***

In In re Sadorus, 2005 WL 3429467 (Bankr. C.D. Ill., 12/8/05), a bankruptcy bucket shop based in California prepared and filed a chapter 7 petition for an Illinois client, who didn't want to disclose the existence of about $6,000 in a non-exempt bank account that a paralegal at the firm advised would be exempt. Of course, the debtor said he'd never have filed for bankruptcy if he knew the funds would not be exempt from his bankruptcy estate. Instead of coming clean with the error and facing the malpractice consequences, the lawyers advised the debtor to skip the first and second scheduled meeting of creditors and to instead lie about his whereabouts, saying that "he was sick for the first meeting and that he forgot the second meeting." This, they advised would (and did) result in dismissal of his case, after which he could "spend the money and ... re-file after the money was gone."

Once the chapter 7 trustee discovered the stupid trick, he brought the matter before the Court, which ordered the lawyers to appear and explain what happened. Not surprisingly, the Court was "not impressed" with their testimony, noting that it "is always suspicious when attorneys do not have documents to support their testimony."

Citing its "inherent power to suspend or disbar attorneys," the Court issued a surprisingly light punishment. It required the lawyers to disgorge the $1,000 fee they received from the debtor, assessed fees and costs in favor of the chapter 7 trustee (who uncovered the "stupid lawyer trick"), and suspended the local attorney from practicing bankruptcy law in the Central District of Illinois until he completed 10 hours of continuing legal education, with at least two hours devoted to ethics. This is not likely to be the end of the story for this hapless attorney.

***

Another "stupid lawyer trick" is found in In re Kollel Mateh Efraim, LLC, 2005 WL 3439684 (Bankr. S.D.N.Y., 12/15/05), where a lawyer failed to obtain his client's consent to a settlement he accepted on the record in open court on behalf of his client. After the lawyer was fired, new counsel submitted an objection to entry of an order approving the settlement, including an affidavit from the former lawyer's clients stating that counsel "never had authority to settle the dispute." The Court also took note of other statements in the affidavits which surely would qualify as "stupid lawyer tricks," if true. The Court reported:

The Supplemental Objection included affidavits signed by Paul and Irene Griffin in which they swore that Orseck never had the authority to settle the dispute. [FN4] Furthermore, the Griffins had planned to attend the July 20th hearing, (Affidavit of Irene Griffin, sworn to Sept. 19, 2005, at �� 4-5) ("Irene Affidavit"), but on July 19th, Orseck's secretary advised them (falsely) that the hearing was adjourned, and they should not come. (Id., � 5.) Irene also heard Orseck's voice in the background telling his secretary to tell the Griffins that "the judge said there were too many witnesses and he needed to allocate more time." (Id.)
[FN4] Orseck also submitted an affidavit in which he swore that although he held a good faith belief that he had actual authority to settle the case on July 20th, he was under a "mistaken impression." After refreshing his recollection with the various communications from his client, he "realized that I never had authority to settle this case in any fashion." (Affidavit of Gerald Orseck, sworn to Sept. 16, 2005, at �� 5-6) ("Orseck Affidavit".) Orseck did not explain the basis of his "good faith" belief, or why the Objection, which he filed, did not assert that he lacked authority.

On July 20th, Orseck called the Griffins at 10:43 a.m. to advise them that he had spoken to Helen-May's business attorney, Dan Scher, Esq. He and Scher expected that the most Helen-May could expect to receive was between $300,000 and $400,000, probably referring to the amount in excess of the $1.4 million Contract price. (Id., � 6.) Paul Griffin responded "absolutely not; get the property back." (Id.) Orseck was in this Courthouse when he made the call, but did not tell the Griffins that he was calling from Court. (Id.)

Paul Griffin immediately called Orseck back at his office, but his secretary said Orseck was out. (Id., � 7.) He then called Scher who denied the statements attributed to him by Orseck. (Id.)

The Griffins got wind of the settlement from Orseck's son, Kirk, the same day. (Id., � 8.) Paul Griffin sent Orseck a fax on July 20th, expressing concern about what Kirk had said, and stated that he and his wife wanted the stay lifted and the Property back. (Irene Affidavit, Ex. C.)

The Griffins met with Orseck on July 22nd. They discussed the rulings regarding the "cure" amount, but Orseck never told them that a hearing had taken place. (Id., � 10.) The Griffins learned about the hearing six days later, on July 28th, when they bumped into Helen-May's trial expert, Gene Barbanti, at a local restaurant. (Id., � 11.) The Griffins expressed shock. (Id.) By coincidence, Orseck and his wife walked into the same restaurant five minutes later, and Orseck asked the Griffins to come to his office the next morning. (Id.) When they arrived the next day, Orseck had already left and cancelled the meeting. (Id.)

On August 5th, the Griffins received the debtor's proposed order. [FN5] They were "mystified," (id., � 14), and Helen-May filed the Objection and the Supplemental Objection discussed earlier. The Court conducted a hearing, and at its suggestion, the debtor filed this motion to enforce the settlement on October 27, 2005. The Court has treated the matter, with the parties' consent, as a motion for summary judgment on the issue of whether Orseck had apparent authority to enter into the settlement. (See Transcript of hearing, held Nov. 22, 2005, at 11) ("11/22 Tr.") (ECF Doc. # 53.)

[FN5] The Griffins had spoken with Orseck on August 3, 2005 about getting the Property back. Orseck failed to mention the settlement. (Irene Affidavit, � 12.)

On the trustee's motion to enforce the settlement, the Court held that "the present record is too thin to grant the motion as a matter of law. Accordingly, the parties are directed to appear for an evidentiary hearing ... to resolve the questions of Orseck's actual and apparent authority."

***

Finally, there's the case of I.G. Petroleum, L.L.C., v. Fenasci (In re West Delta Oil Co.), 2005 WL 3220291 (5th Cir, 12/1/05), involving a "stupid trick" performed by special counsel that had been retained by the debtor to oppose a motion to dismiss the case and a motion to appoint a trustee. Subsequently, while "purporting to represent [the debtor]," the lawyers "wrote letters to potential bidders on the debtor's assets threatening legal action, including Rule 11 sanctions and RICO," while simultaneously working with a separate group of investors who had an interest in acquiring these same debtor's assets.

According to the 5th Circuit, this "active pursuit of success is sufficient to give rise to an adverse interest here," regardless of the "ultimate success of these efforts." Further, the 5th Circuit noted, the lawyers "created incentives [through their letter writing campaign] to lessen the value of the bankruptcy estate, incentives that were acted upon when they attempted to chill the bidding process for the assets." Consequently, the 5th Circuit reversed the judgment of the district court allowing the lawyers' fee application.

The 5th Circuit also faulted the lawyers not only having actual conflicts of interest, but also for failing to make the requisite disclosures with the bankrutpcy court of their potential or actual conflicts. It held that the lawyers "were obligated to report their involvement in [the potential acquisition of the debtor's assets] to the bankruptcy court pursuant to [Bankruptcy] Rule 2014(a)." Further, it held, the bankruptcy court's conclusion that the lawyers "had no interest adverse to that of the estate with respect to the matters on which they were employed" was an "exercise of discretion [that] was flawed by legal error."

The result in this case seems obvious. Indeed, "disclose, disclose, disclose" are the watchwords of any lawyer representing a debtor in bankruptcy. (See also Etoys case reference here). By failing to do so here, while actively undertaking to participate in the purchase of the debtor's assets and simultaneously sending threatening letters on the debtor's behalf to potential bidders of the assets, this case merits inclusion in the "stupid lawyer tricks" category. However, the fact that both the bankruptcy court and the district court were not troubled by the lawyers' conduct, finding that no conflict of interest existed and that fees as special counsel should be allowed, shows that not everyone recognizes a "stupid lawyer trick" when he sees one.

© Steve Jakubowski 2005

Written By:Jeanelle Lust On October 3, 2007 8:57 AM

We were involved in a case where counsel for the bank advised the bank to "conform" promissory notes, by changing the name of the debtor to a debtor controlled entity that the bank had a perfected security interest in (as opposed to not with the debtor) The bank didn't tell the debtor, but guess what? The debtor had the carbons.

Jeanelle Lust
www.knudsenlaw.com

Written By:abiton On June 2, 2009 5:20 AM

abiton says

This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.

Written By:Paul Griffin On January 25, 2010 6:15 PM

I thought that you might be interested to know that after 18 months of litigating the unauthorized settlement by Gerald Orseck in the Kollel case, the court found that Orseck had lied to the court, and to his client, and the settlement was overturned. However, the court has also indicated that our damages and our recovery rest with a malpractice claim against Orseck. We reported the case to the NYS Bar and to the disciplinary committee. So far, there have not been any repercussions for this terrible malpractice, and we can not locate an attorney who will prosecute the case against Orseck.

Written By:Louie James On October 15, 2010 12:49 AM

Your problem about this case is somewhat tricky. You can refer to the bankruptcy lawyer for you to have peace of mind & will be able to solve your problem easily.In fact, we have the same cases, due to the help of legal counsel of bankruptcy lawyer my problem has been solved.

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