When Your Individual Client Files for Bankruptcy: A Brief but Practical Guide for Nonbankruptcy Attorneys ERIN SCHMIDT

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1 When Your Individual Client Files for Bankruptcy: A Brief but Practical Guide for Nonbankruptcy Attorneys ERIN SCHMIDT 56 THE FEDERAL LAWYER January/February 2016

2 H ow does an attorney navigate the legal and ethical obligations attendant with representing an individual client in a nonbankruptcy matter when the client has also sought relief in bankruptcy? The nonbankruptcy matter may involve representing an individual client in a tort case pending in state or federal court. The case might be a personal injury suit for a slip-and-fall accident or an employment discrimination lawsuit. The plaintiff s attorney might represent a group of claimants in a class action suit against a major pharmaceutical company. As counsel in such a matter, the attorney no doubt is knowledgeable in the area of the law at issue and has experience handling matters of that type. But what are the attorney s responsibilities if, during the course of the representation, the attorney learns that the client has filed a bankruptcy case? Perhaps the client recently filed a voluntary petition or is contemplating such relief. Maybe the client joined a class action suit several years ago, filed a bankruptcy case, and received a discharge in the interim, and only now is wondering whether to alert the bankruptcy trustee that a substantial settlement is expected out of the class action lawsuit. As the attorney responsible for representing an individual debtor in a nonbankruptcy matter, you should be aware of the impact of your representation in the underlying bankruptcy case. If your client is a plaintiff or may assert a legal claim, then you may have a fiduciary responsibility not only to the client, but also to the bankruptcy estate and its trustee. You may jeopardize your continued employment or your ability to be paid if you do not abide by the requirements of the Bankruptcy Code. This article explores some of the legal and ethical obligations facing nonbankruptcy attorneys when representing individual clients in civil matters who, during the course of the representation, file a bankruptcy petition. General Bankruptcy Overview for Individual Debtors The vast majority of individual debtors seek protection under Chapter 7 or Chapter 13 of the Bankruptcy Code. 1 Chapter 7 provides for liquidation by a trustee, while Chapter 13 allows debtors with regular January/February 2016 THE FEDERAL LAWYER 57

3 income to pay creditors over the course of three to five years, pursuant to a plan that is confirmed by the court. The filing of a voluntary bankruptcy petition creates an estate. 2 Property of the bankruptcy estate includes all of the debtor s legal and equitable interests in property as of the commencement of the case. 3 In Chapter 13 cases, property of the bankruptcy estate also includes certain property that the debtor acquires after commencement of the case but before the case is closed, dismissed, or converted to another chapter. 4 Thus, regardless of the chapter under which the bankruptcy case is filed, property of the estate includes actual and potential causes of action as of the petition date. In a Chapter 13 case, property of the estate may also include causes of action that arise after the bankruptcy case is filed. When a voluntary bankruptcy petition is filed, the petition operates as a stay of any litigation or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title or to recover a claim against the debtor that arose before the commencement of the case under this title. 5 The filing of a petition also serves as a stay against any collection efforts against the debtor. 6 Nonbankruptcy counsel should consult with bankruptcy counsel to determine how the automatic stay could affect pending litigation. 7 Debtor s Duty To Disclose Debtors are required to list all of their assets on their bankruptcy schedules even those that are unliquidated, contingent, or disputed. 8 For example, if an individual client may have a legal claim against another party that arose before the bankruptcy filing, then the potential cause of action must be listed on Schedule A/B, which is designated for real and personal property. 9 The cause of action must be disclosed even if the debtor is not certain whether it ever will be pursued. An individual debtor also must disclose all lawsuits and administrative proceedings to which the debtor is or was a party within one year preceding the bankruptcy case filing on the form titled Your Statement of Financial Affairs for Individuals Filing for Bankruptcy. 10 Furthermore, in a Chapter 13 bankruptcy, property of the estate includes all property acquired after commencement of the case but before closing, dismissal, or conversion of the case to another chapter. 11 Chapter 13 debtors may need to amend their schedules during the bankruptcy proceedings to disclose additional property. 12 Potential Consequences of Failure To Disclose A debtor may suffer harsh penalties for not disclosing actual and/or potential legal claims. First, the debtor could be charged with a federal crime if the debtor knowingly and fraudulently failed to disclose the cause of action. Second, the debtor s ability to obtain a discharge or attain a successful result in the bankruptcy case could be at risk if the debtor intentionally concealed the asset or knowingly and fraudulently made a false statement or oath in the bankruptcy case. In addition, the doctrine of judicial estoppel may preclude the debtor from proceeding in the underlying litigation itself. In Dismissing Bankruptcy-Debtor Plaintiffs Cases on Judicial Estoppel Grounds, William Burgess discusses how a debtor s failure to disclose a potential or pending cause of action may result in the court precluding the debtor, individually, from pursuing the lawsuit under the judicial estoppel doctrine. As Burgess describes in the article, courts have dismissed lawsuits because debtor plaintiffs failed to disclose causes of action on their bankruptcy schedules. Another potentially adverse consequence to the plaintiff s failure to disclose the asset in the bankruptcy case is that the debtor may not be able to successfully assert an otherwise valid exemption on funds recovered by the trustee. 13 Debtors who fail to disclose bankruptcy estate assets may lose their discharge or be subject to criminal penalties. 14 Every bankruptcy estate, like a probate estate, differs depending upon the individual, the relief being sought, and the assets and obligations at issue. While an individual debtor may be precluded from pursuing certain claims because of disclosure deficiencies, courts are generally less inclined to impose as harsh a sanction on the bankruptcy creditors. Thus, even if the debtor plaintiff has been estopped from pursuing a cause of action, a bankruptcy trustee may be able to pursue recovery for the estate on behalf of creditors. In Reed v. City of Arlington, an en banc Fifth Circuit Court of Appeals held that judicial estoppel did not bar a bankruptcy trustee from pursuing and collecting on a debtor plaintiff s judgment, even if the debtor plaintiff failed to disclose the cause of action on his schedules. 15 The Sixth, Seventh, Tenth, and Eleventh Circuit Courts of Appeals have also held that trustees should not be barred by a debtor s bad acts in failing to disclose bankruptcy estate assets. 16 One issue that may arise is the effect of dismissal of a bankruptcy case in which the debtor failed to disclose a cause of action. When a case is dismissed, the property of the bankruptcy estate generally revests in the debtor. 17 However, at least one court has found that if a debtor fails to disclose a cause of action in a bankruptcy case that is subsequently dismissed, the debtor may be estopped from taking an inconsistent position on that litigation later. 18 Thus, judicial estoppel may apply if a debtor failed to disclose an actual or potential legal claim on bankruptcy schedules, even if the bankruptcy case was subsequently dismissed. While the duty of disclosure cannot be emphasized enough, a debtor may be able to remedy true oversights in disclosing causes of action and judgments. It is likely that many debtors who fail to disclose lawsuits or potential causes of action do so without fraudulent intent. A common scenario in Chapter 7 cases is when an individual opts into a class action lawsuit years before filing for bankruptcy. The individual seeks bankruptcy relief, but forgets to list the pending lawsuit on either the schedules or statement of financial affairs. When the lawsuit is finally reduced to judgment, the attorney in the class action case learns of the client s bankruptcy. Under these circumstances, the debtor should amend the schedules to disclose the lawsuit and judgment. 19 Bankruptcy counsel should also alert the Chapter 7 trustee that money is available to the estate for distribution. If the debtor has already been discharged and the bankruptcy case closed, the case should be reopened so funds may be distributed to creditors. In this instance, the class action attorney should speak with the debtor and bankruptcy counsel about filing a motion to reopen the bankruptcy case. If the debtor seeks to reopen the case, there are fewer issues regarding disclosure. Once the case is reopened, the U.S. trustee or bankruptcy administrator 20 will appoint a trustee to notify creditors of possible assets and distribute funds. Disclosure of Debtors Transactions With Attorneys The Bankruptcy Code imposes rigorous disclosure requirements on debtors attorneys, irrespective of whether the representation is in the actual bankruptcy proceeding or in a separate matter entirely so long as there is some connection to the bankruptcy estate. These requirements, which date at least as far back as the Bankruptcy Act 58 THE FEDERAL LAWYER January/February 2016

4 of 1898, were passed because of the temptation of a failing debtor to deal too liberally with his property in employing counsel to protect him in view of financial reverses and probable failure. 21 Section 329(a) of the Bankruptcy Code requires any attorney representing a debtor in a bankruptcy case, or in connection with such a case, to file a statement of compensation paid or agreed to be paid for services rendered or to be rendered in contemplation of or in connection with the case if the payment or agreement was made after one year before the date of the filing of the petition. 22 This duty of disclosure is ongoing and continues after the bankruptcy case is filed. In addition, Bankruptcy Rule 2016(b) specifically provides that a supplemental statement must be filed within 14 days after any payment or agreement not previously disclosed. 23 Attorneys may be inclined to interpret the section 329 disclosure requirements to mean disclosure is only required if they provided bankruptcy related advice or are employed to represent the debtor in the bankruptcy case. However, as many courts recognize, the statutory language is broader than that. For example, if the facts giving rise to the pre-petition service were the same circumstances that led to the bankruptcy filing, an attorney may have to disclose compensation. These services may include providing pre-petition debt settlement services, 24 legal work intended to avoid bankruptcy, 25 and even criminal defense advice if the issues surrounding the potential crime are the same that led to bankruptcy. 26 Moreover, work performed by an attorney representing the debtor in a nonbankruptcy cause of action may be viewed as subject to the Bankruptcy Code s disclosure requirements. 27 The bankruptcy court may examine the fees disclosed under section 329(a) and, if the compensation exceeds the reasonable value of any such services, may direct disgorgement. 28 Furthermore, the bankruptcy court may direct disgorgement for failing to comply with the filing requirements for statements of compensation. 29 Practical Implications of the Bankruptcy Filing on the Continued Employment of the Nonbankruptcy Attorney Once a bankruptcy case has been filed, the appropriate manner for an attorney handling a matter related to the bankruptcy estate to proceed will depend, in part, on when the legal claim arose, the chapter of the Bankruptcy Code under which the bankruptcy case is pending, the status of the bankruptcy case and events that have occurred in that case to date, and case law in the jurisdictions in which the bankruptcy case and legal claim are pending. Attorney Employment Issues When a Chapter 7 Case Is Filed If the legal claim is arguably property of a Chapter 7 debtor s bankruptcy estate, the plaintiff s attorney must discuss employment and coordinate future action with the Chapter 7 trustee. The Chapter 7 trustee has discretion in deciding whether to pursue a cause of action belonging to the estate. 30 Trustees will conduct a cost-benefit analysis in determining whether to proceed with litigation. 31 If the trustee decides the lawsuit will not bring sufficient money into the estate for unsecured creditors to outweigh the cost of pursuing the legal action, then the cause of action could, upon notice and hearing, 32 either be abandoned 33 or sold to the highest bidder to maximize value for the estate. 34 Sometimes that highest bidder may be the defendant in the underlying action, who buys the case to extinguish the threat of a lawsuit. If the lawsuit is abandoned, then the cause of action reverts back to whoever may assert a possessory interest in the property. 35 If the Chapter 7 trustee decides to pursue the cause of action, the trustee most likely will need to retain outside counsel. The trustee is under no obligation to continue to employ current counsel and may instead retain a different attorney to pursue the cause of action. Sometimes, trustees ask an independent attorney to investigate the merits of a particular legal claim before deciding whether to pursue the lawsuit. However, most trustees would rather work with an attorney who is already familiar with the ongoing litigation typically the attorney already handling the matter. Even if the debtor acted in bad faith during the bankruptcy, the trustee may still continue to employ the attorney already handling the matter so long as that attorney was not complicit in the debtor s wrongdoing. 36 Of course, current counsel in the underlying legal action may choose not to continue the representation once the bankruptcy case has been filed. If the attorney wants to continue the representation, albeit of the bankruptcy estate now instead of the debtor, then the attorney should first review the applicable rules of professional conduct to ensure that representation of the estate does not present ethical issues in light of the former, and perhaps concurrent, representation of the debtor. If the attorney decides to proceed, then compensation arrangements must be negotiated with the Chapter 7 trustee. The attorney may be retained either on an hourly fee basis or a contingency fee arrangement. In most instances involving a personal injury claim or medical manufacturer class action suit, the trustee and the attorney handling the claim or lawsuit will agree to a contingency fee arrangement. Courts approve contingency fee arrangements under section 328(a) of the Bankruptcy Code, which provides that the trustee may, with court approval, employ professionals on any reasonable terms and conditions of employment. 37 If such terms are approved, they may be modified only if the court determines that the original terms were improvident in light of [subsequent] developments. 38 The Bankruptcy Code and case law are clear that attorneys representing the Chapter 7 trustee must seek court approval for both employment and payment of fees. 39 After the Chapter 7 trustee and the plaintiff s attorney agree to the terms of employment, the proposed employment must be presented to the court for approval. The first step in this process is the filing of an employment application in which the trustee requests the court s approval of the employment under section 327 of the Bankruptcy Code. 40 Employee applications under section 327 of the Bankruptcy Code must not only identify the attorney, the reason that the attorney should be employed, and the proposed compensation arrangements, but must also disclose the attorney s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, and the United States trustee or any person employed in the office of the United States trustee. 41 This disclosure requirement is so critical that the Bankruptcy Rules require, in addition to the employment application, a verified statement from the attorney to be employed setting forth these same connections. 42 An attorney s failure to disclose connections may result in the denial of compensation. 43 Chapter 7 trustees typically seek to retain an attorney to pursue causes of action under section 327(e) of the Bankruptcy Code, which addresses the employment of special counsel. Section 327(a), in contrast, addresses the retention of professionals to assist the trustee in the administration of the bankruptcy case itself. Attorneys employed under section 327(a) must not hold or represent an interest adverse to the bankruptcy estate and must be disinterested, a term that is specifically defined in the Bankruptcy Code. 44 In contrast, it is permissible for January/February 2016 THE FEDERAL LAWYER 59

5 special counsel employed under section 327(e) to have represented the debtor, if the employment is in the best interest of the bankruptcy estate, and the plaintiff s attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which the plaintiff s attorney is to be employed. 45 Among other things, courts have interpreted this to mean that special counsel may not be disqualified solely because the debtor owes special counsel money for pre-petition services. 46 However, special counsel have been disqualified for a variety of reasons including involvement with investors interested in acquiring estate assets, 47 pre-petition representation of a debtor in an asbestos litigation suit while simultaneously serving as co-counsel for attorneys representing the other side in various insurance matters, 48 and failure to disclose prior representation of a major estate creditor. 49 A Chapter 7 trustee should seek court approval of the attorney s employment before work commences. Depending on the circumstances and the jurisdiction, it may be possible to obtain an order approving employment after employment commences. 50 However, an attorney whose employment is not timely approved risks not being paid for work performed prior to the entry of the order approving the employment. 51 Nevertheless, it is likely a better option to seek retroactive employment back to the date the attorney first performed work for the estate than to seek payment of fees without benefit of an employment order from the bankruptcy court. Attorney Employment Issues When a Chapter 13 Case Is Filed Employment issues are not as clear cut in Chapter 13 cases. If the client has filed for Chapter 13, an attorney handling nonbankruptcy litigation for the client should review controlling case law to determine if an application under section 327 should be filed. While most circuit courts of appeals have found that Chapter 13 debtors have standing to bring claims in their own right, 52 some courts have found or at least implied that such standing is concurrent with a Chapter 13 trustee s ability to bring such claims. 53 This issue arises because the powers typically allocated to trustees in a Chapter 7 case are split between the trustee and debtor in a Chapter 13 case. 54 Furthermore, once a Chapter 13 plan is confirmed, property of the bankruptcy estate vests back with the debtor except as provided otherwise in the plan or in the order confirming the plan. 55 Therefore, parties should review both the confirmed Chapter 13 plan and confirmation order when addressing attorney employment issues in Chapter 13 cases. Furthermore, counsel retained to represent a Chapter 13 debtor may be compensated under 330(a)(4)(B) 56 of the Bankruptcy Code even if not retained under section 327. Section 330(a)(4)(B) provides that courts may permit reasonable compensation to counsel for representing the interests of the debtor in connection with the bankruptcy case based on consideration of the benefit and necessity of such services to the debtor and the other factors set forth under section 330. Some courts have construed section 330(a)(4)(B) as providing a mechanism to compensate debtor s counsel notwithstanding that debtor s counsel has not been employed under section Practical Implications of the Bankruptcy Filing on Compensation for the Nonbankruptcy Attorney Attorneys want to be paid for their work. While section 327 of the Bankruptcy Code governs the employment of attorneys, section 330(a) of the Bankruptcy Code governs their compensation. Under section 330(a)(1), the court may award a professional person employed under section 327 reasonable compensation for actual, necessary services and actual necessary expenses. Assuming the attorney has been retained under section 327, an application requesting approval of fees under section 330(a)(1) must then be filed with the bankruptcy court and noticed out to interested parties, including the U.S. Trustee. 58 The application may also be set for hearing before the bankruptcy court. 59 Section 330(a)(3) sets out various factors the bankruptcy court may consider in evaluating the reasonableness of the services rendered, which include the time spent, hourly rates, the necessity of the services, if the services were commensurate with the complexity, importance, and the nature of the problem, issue, or task addressed. 60 Generally, attorneys employed on an hourly basis must provide an itemized breakdown of work performed and expenses incurred. Even attorneys employed on a contingency fee basis may need to provide a narrative explaining the work performed and the results achieved. Interested parties will have an opportunity to review fee applications and object. In Chapter 13 cases where an attorney has not been retained under section 327 but has still performed services for the debtor, counsel may be able to seek compensation under section 330(a)(4)(B). 61 Before requesting fees under section 330(a), an attorney should review the bankruptcy court s local rules and general orders for guidance. The attorney also may want to seek guidance from the trustee with respect to what information the court will expect on the application, or talk with experienced bankruptcy attorneys who practice regularly before the court. Trustees and experienced bankruptcy attorneys usually are happy to share their insights. Parties may object to fees if there was little to no commensurate benefit to the bankruptcy estate. For example, a trustee may employ a plaintiff s attorney to pursue litigation which does not pan out. Parties may also ask a plaintiff s attorney to reduce fees so they do not exceed the benefits provided. Generally, however, trustees will for those reasons negotiate contingency fee arrangements in those cases where recovery is risky. If a fee arrangement was pre-approved under section 328(a), the bankruptcy court may have limited ability to inquire into the reasonableness of fees under section 330(a), as some circuit courts of appeals have found that a section 328(a) analysis is mutually exclusive from a section 330(a) reasonableness evaluation. 62 For that reason, interested parties may ask courts to include a provision in the employment order requiring fee review under a section 330(a)(1) standard rather than a section 328 standard. 63 There may be instances in which an attorney is owed money for pre-petition work when the client files a bankruptcy case. In this instance, the attorney will have to look for payment with other general unsecured creditors unless an enforceable lien encumbers any proceeds derived from the cause of action. Trustees in Chapter 7 continued on page 89 Erin Schmidt is a trial attorney with the Office of the U.S. Trustee in Dallas, Texas. The opinions expressed in this article are those of the author and not those of the U.S. Trustee Program or the U.S. Department of Justice. Erin started with the U.S. Trustee Program in 2002 as an honors attorney. She attended law school at the University of Texas in Austin and earned a B.A. from Smith College. In addition to representing the U.S. Trustee in Dallas as a trial attorney, Erin also serves as a regional appellate coordinator for the U.S. Trustee Program Erin Schmidt. All rights reserved. 60 THE FEDERAL LAWYER January/February 2016

6 Client continued from page 60 and Chapter 13 cases distribute funds only to those pre-petition unsecured claimants who have allowed proofs of claim. Thus, it may be necessary for an attorney to file a proof of claim. 64 Allowed general unsecured claims usually are paid, if at all, pro rata from estate assets or plan payments, after certain other claims, such as allowed administrative and tax claims, have been paid. 65 Practical Implications of the Bankruptcy Filing on Settlement Negotiations for Nonbankruptcy Matters Legal claims are frequently settled prior to trial and negotiations leading to settlement may include the parties, insurers and other interested parties. When a Chapter 7 bankruptcy case has been filed by one of the parties, then the bankruptcy estate and trustee must be involved in the settlement discussions. In addition, before a claim can be fully and finally resolved, the bankruptcy court must approve any settlement by the Chapter 7 trustee on behalf of the estate. 66 Because the settlement will affect the administration of estate assets and the possible distribution of funds to creditors, the trustee must also provide notice to interested parties with an opportunity to review and object to the proposed settlement. 67 In determining whether or not to approve a proposed settlement, 68 a bankruptcy court may examine the merits of the proposed compromise, including the probabilities of successful litigation, any difficulties associated with the collection of judgment, and all other factors relevant to a full and fair assessment of the wisdom of the compromise. 69 In a Chapter 13 case, the plaintiff s attorney should consult with the bankruptcy counsel and the Chapter 13 trustee regarding any potential settlement. The proper procedure for pursuing settlement may be affected by the stage of the bankruptcy case, the terms of the Chapter 13 plan, the confirmation order, and applicable case law. Input from counsel for the bankruptcy estate and the Chapter 13 trustee will help ensure that the underlying claim is fully and finally resolved. Conclusion Bankruptcy requires openness and transparency. A client who fails to disclose a legal claim in a bankruptcy case risks serious consequences, including the possibility of being judicially estopped from asserting the legal claim at a later date. However, some best practices will help both clients and nonbankruptcy attorneys navigate the bankruptcy terrain. Attorneys representing clients in nonbankruptcy matters should ask clients up front whether they have recently filed for bankruptcy or intend to file. These attorneys may also consider a PACER search to determine whether clients have filed for bankruptcy or obtained a discharge in a case filed after the events giving rise to the legal claim arose. Attorneys should also periodically check in with clients to see if clients have filed for bankruptcy during the course of the litigation. They may also seek to educate clients on the perils of not disclosing lawsuits to the bankruptcy court. Attorneys representing clients in nonbankruptcy matters also need to be aware that they may have a duty to disclose their representation agreements and payments related thereto to the bankruptcy court if the work performed was in contemplation of filing bankruptcy or is in connection with the bankruptcy case. However, bankruptcy may also provide an opportunity to such attorneys for further employment by the trustee as special counsel to pursue litigation on behalf of the estate. In the end, transparency and disclosure are two of the cornerstones of bankruptcy law that even nonbankruptcy attorneys need to be aware of in order to protect their clients and themselves. A basic knowledge of the Bankruptcy Code and rules will help nonbankruptcy attorneys navigate through this process. Endnotes 1 Individual debtors may also seek bankruptcy relief under two additional chapters of the Bankruptcy Code; Chapters 11 and 12. Chapter 11 is not restricted to a specific class of individuals, while Chapter 12 is reserved for family farmers and fishermen. While both chapters borrow from the provisions governing Chapter 13 cases, Chapter 12 more closely parallels the Chapter 13 provisions. Because most individual debtors file for bankruptcy relief under chapters 7 and 13, this article will not address issues arising under chapters 11 and 12. However, some concepts discussed in this article do apply in chapters 11 and 12, and it is therefore recommended that when counsel is involved with an individual Chapter 11 or 12 case, counsel consult with a bankruptcy expert U.S.C. 541(a) U.S.C. 541(a)(1) U.S.C. 1306(a) U.S.C. 362(a)(1) U.S.C. 362(a)(2). 7 This article does not address the implications of the automatic stay U.S.C. 521(a)(1)(B)(i). See also Fed. R. Bankr. P. Official Forms B 106D and B 106E/F (which require individual debtors to disclose whether the debts are contingent, unliquidated, or disputed). 9 Fed. R. Bankr. P. Official Form B 106A/B. 10 Fed. R. Bankr. P. Official Form B 107. Bankruptcy practitioners commonly refer to the Statement of Financial Affairs as the SOFA U.S.C. 1306(a)(1). 12 See, e.g., Waldron v. Brown (In re Waldron), 536 F.3d 1239, 1242 (11th Cir. 2008)(holding Chapter 13 debtors should amend schedules to disclose post-petition settlement proceeds for post-confirmation claim). 13 See In re Roberts, 527 B.R. 461 (Bankr. N.D. Fla. 2015)(denying debtors homestead exemption because they converted nonexempt funds into homestead on eve of bankruptcy without disclosing conversion). 14 Chapter 7 debtors who fail to disclose a lawsuit or collect on a judgment without turning monies over to the trustee may also risk denial or revocation of their bankruptcy discharges. Section 727(a) of the Bankruptcy Code provides that courts may deny discharges to individual debtors who conceal property of the estate or knowingly make false oaths in connection with their bankruptcy cases. A court also may revoke a Chapter 7 debtor s discharge if the discharge was obtained through fraud or if the debtor acquired property of the estate but failed to turn it over to the trustee. 11 U.S.C. 727(d). While section 727 applies only to Chapter 7 cases, debtors who hide assets in Chapter 13 cases may also be subject to certain civil consequences. See, e.g., 11 U.S.C. 1325(a) (3) (plan may be denied if proposed in bad faith); 1330 (confirmation may be revoked if procured by fraud); 1307(c) (conversion of Chapter 13 case to Chapter January/February 2016 THE FEDERAL LAWYER 89

7 7 for cause). Title 18 of the U.S. Code contains bankruptcy crime provisions. Section 152 addresses concealment of property in connection with a bankruptcy case as well as false oaths and statements under penalty of perjury. 18 U.S.C Reed v. City of Arlington, 650 F.3d 571, 576 (5th Cir. 2011). 16 Stephenson v. Malloy, 700 F.3d 265 (6th Cir. 2012); Biesek v. Soo Line R.R. Co., 440 F.3d 410, 413 (7th Cir. 2006); Eastman v. Union Pac. R.R. Co., 493 F.3d 1151, 1155 n.3 (10th Cir. 2007); and Parker v. Wendy s International Inc., 365 F.3d 1268 (11th Cir. 2004) U.S.C. 349(b)(3) (providing for the revesting of property of the estate in the entity in which such property was vested prior to the commencement of the bankruptcy case unless ordered otherwise). 18 See, e.g., Kunica v. St. Jean Financial Inc., 233 B.R. 46, (Bankr. S.D.N.Y. 1999). 19 Federal Rule of Bankruptcy Procedure 1009(a) permits debtors to amend petitions, lists, schedules, and statements of financial affairs. 20 U.S. trustees supervise and oversee the administration of bankruptcy cases and trustees in 48 states, while bankruptcy administrators undertake a similar role in the remaining two states. 28 U.S.C. 581 and 586(a); bankruptcy judges, U.S. trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L , 100 Stat. 3119, In re Wood, 210 U.S. 246, 253 (1908) U.S.C. 329(a). 23 Fed. R. Bankr. P. 2016(b). 24 In re Gage, 394 B.R. 184, 194 (Bankr. N.D. Ill. 2008)(holding that fees paid to attorney for drafting a forbearance letter was in contemplation of the debtor s bankruptcy). 25 Hearn v. Persels & Assoc. (In re Hearn), No , 2011 Bankr. Lexis 4258, at *12 (Bankr. M.D. N.C. Nov. 4, 2011). But see In re Newton, 292 B.R. 563, 569 (Bankr. E.D. Tex. 2003)(holding that counsel did not have to disclose pre-petition transfer of funds because funds remitted in connection with a prior bankruptcy unrelated to current case). 26 See, e.g., Wooten v. Ravkind (In re Dixon), 143 B.R. 671 (Bankr. N.D. Tex. 1992). 27 All attorneys who represent a debtor in bankruptcy regardless of chapter file a Form B 2030 Disclosure of Compensation for Attorney for Debtor to fulfill their reporting requirements under 11 U.S.C. 329(a) and Fed. R. Bankr. P Attorneys who fail to disclose fees risk having their fees disgorged. See, e.g., In re Ball, No , 2011 WL (Bankr. S.D. Tex. Sept. 23, 2011)(denying Chapter 13 counsel fees because Rule 2016(b) statement filed 100 days after order for relief); Geisenberger v. DeAngelis, No , 2011 WL (Bankr. M.D. Pa. Sept. 23, 2011)(placing burden on counsel to disclose fees; reliance on debtor to disclose pre-petition transfers on SOFAs is not sufficient) U.S.C. 329(b); Fed. R. Bankr. P See, e.g., Arens v. Boughton (In re Prudhomme), 43 F.3d 1000, 1004 (5th Cir. 1995) (directing disgorgement of fees for failure to disclose pre-petition compensation). 30 See, e.g., Koch Refining v. Farmers Union Cent. Exchange Inc., 831 F.2d 1339, (7th Cir. 1987). 31 Some considerations in this analysis include weighing the probabilities of prevailing in the litigation; whether the defendant would be able to satisfy a judgment, whether there are sufficient funds on hand in the estate to fund the litigation, whether counsel would take on the case on a contingency or hourly fee basis, and whether the trustee would have to borrow money to fund any litigation. 32 The Bankruptcy Code defines after notice and a hearing to mean such notice as is appropriate in the particular circumstances and that a hearing need not be held if notice was given properly and either no party requested a hearing or there is insufficient time for a hearing to be conducted. 11 U.S.C. 102(1)(A) and (B) U.S.C U.S.C. 363(b)(1) U.S.C See, e.g., Dewsnup v. Timm (In re Dewsnup), 908 F.2d 588, 590 (10th Cir. 1990), aff d, 502 U.S. 410 (1992). 36 While the debtor/plaintiff ended up losing his recovery in Reed v. City of Arlington, 650 F.3d 571 (5th Cir. 2011), the results were not nearly as dismal for his attorney, who was retained as counsel for the bankruptcy trustee and was paid for his efforts. See In re Lubke, case no (Bankr. N.D. Tex.), docket nos. 47, 55, 56, and 72. Counsel had had no knowledge of his client s bankruptcy and had informed the trustee as soon as he learned of the filing. See id., docket no U.S.C. 328(a). 38 Id U.S.C. 327 and U.S.C Fed. R. Bankr. P. 2014(a). 42 Fed. R. Bankr. P. 2014(a). 43 I.G. Petroleum LLC v. Fenasci (In re West Delta Oil Co. Inc.), 432 F.3d 347, 356 (5th Cir. 2005) U.S.C. 101(14) U.S.C. 327(e). 46 Bank of Brussels Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, 622 (2d Cir. 2009). 47 I.G. Petroleum, LLC v. Fenasci (In re West Delta Oil Co. Inc.), 432 F.3d 347 (5th Cir. 2005). 48 Century Indemnity Co. v. Congoleum Corp. (In re Congoleum Corp.), 426 F.3d 675, 683 (3d Cir. 2005). 49 Gosser v. Arkison (In re Hammer), case no , 2007 WL (B.A.P. 9th Cir. Aug. 17, 2007). 50 See, e.g., In re Triangle Chemicals Inc., 697 F.2d 1280, 1289 (5th Cir. 1983) (holding that while courts have discretion to grant nunc pro tunc relief, such approval should not be granted without regard to circumstances, facts, and equities of the case). 51 Both the Seventh and Tenth Circuit Courts of Appeal have found that nunc pro tunc authority should be rarely exercised. See Transamerica Ins. Co. v. South, 975 F.2d 321, (7th Cir. 1992); W.F. Sebel Co. v. Hessee (In re Fractman), 214 F.2d 459, 462 (10th Cir. 1954). 52 See, e.g., Wilson v. Dollar General Corp., 717 F.3d 337, 343 (4th Cir. 2013) (citing Smith v. Rockett, 522 F.3d 1080, 1082 (10th Cir. 2008)); Crosby v. Monroe Cnty., 394 F.3d 1328, 1331 n. 2 (11th Cir. 2004); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, (2d Cir. 1998). 53 See, e.g., Wilson v. Dollar General Corp., 717 F.3d 337, 343 (4th Cir. 2013). 54 See 11 U.S.C. 1303, which provides the debtor shall have, exclusive of the trustee, the rights and powers of a trustee to use, sell, or lease property U.S.C. 1327(b) U.S.C. 330(a)(4)(B) also applies to Chapter 12 individual debtors. 57 See, e.g., In re Young, 285 B.R. 168, (Bankr. D. Md. 2002). But see, e.g., 90 THE FEDERAL LAWYER January/February 2016

8 In re Swenson, No , 2013 WL , at *3-*5 (Bankr. D. Kansas Jul. 16, 2013)(holding that counsel must still be employed under 11 U.S.C. 327 to be compensated under 11 U.S.C. 330(a)(4) (B) in Chapter 12 case) U.S.C. 330(a). 59 Id U.S.C. 330(a)(3) U.S.C. 330(a)(4)(B). 62 See, e.g., Riker v. Official Committee of Unsecured Creditors (In re Smart World Technologies LLC), 552 F.3d 228 (2d Cir. 2009) (holding that review of fees under 328(a) standard is mutually exclusive from 330(a) reasonableness analysis). 63 In Chapter 13 cases, fees may be evaluated under section 330(a)(4)(B) standard instead of section 330(a)(1) U.S.C. 501(a). 65 See 11 U.S.C. 503 and Fed. R. Bankr. P. 9019(a). 67 Fed. R. Bankr. P. 9019(a). 68 See, e.g., Connecticut Gen. Life Ins. Co. v. United Cos. Fin. Corp. (In re Foster Mortgage Corp.), 68 F.3d 914, 917 (5th Cir. 1993); Drexel Burnham Lambert Inc. v. Flight Transportation Corp. (In re Flight Transportation Corp. Securities Litigation), 730 F.2d 1128, 1135 (8th Cir. 1984). 69 Protective Committee for Independent Stockholders of TMT Trailer Ferr, Inc., v. Anderson, 88 S. Ct. 1157, 1163 (1968). Washington Watch continued from page 6 Operational Priorities and Temporary Judgeships Significant operational priorities are also funded by the omnibus, including the expansion of the judiciary s enterprise hosting and cloud computing initiative to more courts, the replacement of the judiciary s system and greater use by federal probation supervisors of evidence-based practices to reduce recidivism. Adequate funding for jury fees is also provided, though the judiciary s requested $10 increase in the daily attendance fee (from $40 to $50) was not approved. Finally, nine temporary district judgeships are extended, at the judiciary s request, in the Eastern District of Missouri, District of Kansas, District of Arizona, Central District of California, Northern District of Alabama, Southern District of Florida, District of New Mexico, Western District of North Carolina, and Eastern District of Texas. TREAT YOURSELF Complimentary upgrade on us. Arrive at your destination in style and comfort. Make the most of your next trip with a complimentary upgrade when you use coupon # UUGA037. Plus, always receive up to 25% off with AWD # A Reserve today at avis.com/federalbar or call Terms and Conditions: Offer valid for a one time, one car group upgrade on an intermediate (group C) through a full-size four-door (group E) car. Maximum upgrade to premium (group G), excluding intermediate SUV (group F). Offer valid on daily, weekend, weekly and monthly rates only. The upgraded car is subject to vehicle availability at the time of rental and may not be available on some rates at some times. Valid at participating Avis locations in the contiguous U.S. and Canada. The savings of up to 25% applies to the time-and-mileage charges only of the rental. Mention AWD # A to receive this discount. One coupon per rental. A 24-hour advance reservation is required. May not be used in conjunction with any other coupon, promotion or offer. Upgrade will be applied at vehicle pick-up time. Renter must meet Avis age, driver and credit requirements. Minimum age may vary by location. An additional daily surcharge may apply for renters under 25 years old. Fuel charges are extra. Rental must begin by December 31, Avis Rent A Car System, LLC January/February 2016 THE FEDERAL LAWYER 91