Bench & Bar of Minnesota

December 2001

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Attorney-Client Privilege and the Bankruptcy Code

By Christopher M. Kennedy

As has been widely reported, Congress is considering major revisions to the Bankruptcy Code. The most talked about revisions are provisions that are intended to place more debtors in payment plans (Chapter 13) than in fresh start bankruptcies (Chapter 7). The effort has generated great debate amongst Congress, creditors, and bankruptcy practitioners. Less debated and potentially more dangerous are the changes that are proposed to the attorney-client privilege. All attorneys, no matter what their field of practice, should pay attention to the effect of this legislation. If it is allowed to become effective and is upheld by the courts, it will set a dangerous precedent in how legislatures are able to control the attorney-client relationship.

The proposed bankruptcy legislation includes enhanced attorney liability provisions (Senate Bill 340 and H.R. Bill 333). These provisions provide that the attorney is responsible to investigate and affirm the provisions of the bankruptcy petition are accurate. This will require that attorneys investigate the information provided by their clients.

The current Bankruptcy Code requires that debtors are responsible for the accuracy of their bankruptcy petition and schedules. Attorneys, under Bankruptcy Rule 9001, are responsible to affirm that the bankruptcy filing is warranted by the facts of the case. The proposed change would require attorneys to make an affirmative investigation into the financial condition of the debtor. The attorney would have to review all of the information to ensure that it is accurate and warrant that the inquiry revealed no inaccuracy. Proposed changes would require the court to impose penalties against attorneys found to violate the rule, even inadvertently. If the debtor is denied a discharge or fails the means test, the attorney is liable for the costs of the trustee who contested the discharge. The proposed changes also include provisions for random audits of cases, which the attorney would have to defend.

The proposed changes will create problems for the attorney-client relationship. The attorney is now duty-bound to investigate her own client. There is also an inherent conflict as the attorney is bound to investigate the matter not in an effort to protect her client's rights but to protect her own.

If the attorney finds adverse information, rather than advocate his client's position he will turn into an informer. If the attorney does not inform against his client then he risks being liable for the costs of the action. The proposed law will have a chilling effect on the representation of clients. Clients will be wary as to whose interests the attorney represents. Attorneys will be less inclined to take cases in which close issues are raised. The proposed change will also force attorneys to charge more to cover the additional risks. The additional fees may keep the most deserving debtors from being able to file for the protection provided under the code.

The proposed changes will also clarify the issue of reaffirmation agreements. Under present law debtors may reaffirm debts provided that the decision is voluntary and will not create an undue hardship. Under the proposed law the attorney will be responsible for determining the appropriateness of the reaffirmation. Counsel will be required to certify that "in the opinion of the attorney" the debtor is able to make the payments required under the reaffirmation agreement. Imagine a scenario where the client wants to reaffirm the debt but the attorney does not believe that the client has the ability to make the payments.
The proposed law would seem to make it clear that the attorney should not sign the agreement and the reaffirmation would not take effect, even though this is contrary to the express wishes of the client. If the attorney agrees to sign a reaffirmation agreement and the court later finds that the reaffirmation agreement was not proper under the circumstances, then the debtor's attorney is subject to a mandatory sanction. This sanction is overly severe. The Bankruptcy Code currently has language to penalize attorneys for creditors for taking unnecessary action. In those cases, if counsel for a creditor can show that he acted in good faith, he is not subject to those sanctions. The new language would not provide any similar safe harbor for debtors' attorneys.

The proposed law would require any attorney, or law firm, that receives compensation for representing a consumer debtor to be considered a debt relief agency. The proposed law then goes on to regulate debt relief agencies. Debt relief agencies must provide disclosure statements to all potential clients. The disclosure statement would be required to explain the duties of an attorney in a bankruptcy. The debt relief agency is required to keep that disclosure for two years. If the agency does not perform all agreed-upon services, then it would lose all of its fees and would be subject to additional penalties. Additionally, all advertising by the attorney who is considered a debt relief agency would have to include a disclaimer stating: "We are a debt-relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

The proposed changes will have a chilling effect on attorney-client relationships. They put the attorney in the position of either protecting her rights or those of her client. The changes will breed further mistrust for our profession. Clients will fear that their attorney is not protecting their rights but rather is looking to protect only her own interests. The provisions will increase the costs of bankruptcy by requiring attorneys to be subject to higher risks and having to spend additional time investigating their own clients. The provisions also set a dangerous precedent in mandating different degrees of representation to be provided by attorneys depending on their area of practice. It is easy to imagine these requirements being expanded to other practice areas.

CHRISTOPHER M. KENNEDY is a partner in the law firm of Kennedy & Kennedy in Mankato, Minnesota and is the president-elect of the 6th District Bar. He practices in the areas of debtor-creditor rights, bankruptcy, and municipal litigation.