Inside Track: Ethical Dilemmas: Must a Lawyer Disclose a Client's Intention to File Bankruptcy?:

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  • October
    21
    2015

    Ethical Dilemmas: Must a Lawyer Disclose a Client's Intention to File Bankruptcy?

    Timothy J. Pierce

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    Oct. 21, 2015 – Does confidentiality to a client intending to file bankruptcy trump a duty of disclosure to opposing counsel, the plaintiff, and trial court?

    Question

    Law Firm represents Client as a defendant in civil litigation and the case is set with a firm trial date. In the months leading up to trial date, Law Firm and Client discuss the possibility of Client filing for bankruptcy, which would greatly affect the case, but they do not disclose this information to the plaintiff or trial court.

    Tim Pierceorg tpierce wisbar Tim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by org tpierce wisbar email.

    As the trial date approaches, Law Firm complies with scheduling order and files witness and exhibit lists. On the day before trial, Law Firm notifies the court and plaintiff that Client has filed for bankruptcy protection and the court dismisses the case without prejudice. Plaintiff’s counsel immediately moves the trial court for sanctions, arguing that Law Firm had duty to inform the court and plaintiff that the Client might file bankruptcy. Law Firm asserts that it would have violated their duty of confidentiality to Client to disclose.

    Did Law Firm have a duty to disclose that Client would likely file bankruptcy?

    Answer

    This question is a simplified version of the events of McNally v. Rey, 659 S.E.2d 279 (Va., 2008). In that case, the circuit court imposed sanctions, finding that the filing of the witness and exhibition lists shortly before trial was not in good faith or well-grounded in fact, and was for an improper purpose because counsel knew that the case would not be tried.

    The Virginia Supreme Court reversed, stating:

    “Additionally, counsel of record in a state court proceeding, who represents a litigant contemplating filing a petition in bankruptcy in a federal bankruptcy court, does not have an obligation to inform opposing counsel or the circuit court that the attorney's client is considering filing a petition in bankruptcy. A litigant's decision to file a petition in bankruptcy while litigation is pending does not constitute a violation of Code § 8.01–271.1 provided such filing is in compliance with the federal Bankruptcy Code, 11 U.S.C. § 101, et seq. To hold otherwise would have a chilling effect upon the rights of litigants and their attorneys when such litigants seek to avail themselves of their statutory rights set forth in the federal Bankruptcy Code. Therefore, we hold that the circuit court abused its discretion by imposing sanctions upon McNally.”

    McNally is not a disciplinary case, and the Virginia court did not address the lawyer’s obligations under the disciplinary rules. Analysis under the relevant rules however yields the same result. SCR 20:1.6 (Confidentiality) provides no exception to disclose a client’s deliberations about strategy or options. Perhaps more germane, Comment [3] to SCR 20:3.3 (The duty of Candor toward the tribunal) states “(t)here are circumstances where failure to make a disclosure is the equivalent of an affirmative misrepresentation.”

    The Virginia court clearly stated, however, that the lawyer had no obligation to disclose. Disclosure of a client’s strategic decision to pursue bankruptcy and the timing thereof is not necessary to disclose to avoid misleading the court.




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