Lawyers can pay themselves bankruptcy fees at filing time

The Virginia State Bar’s ethics committee has made it official: Lawyers may claim their full flat fees for consumer bankruptcies at the time of filing the bankruptcy petitions.

The guidance reflected in a Legal Ethics Opinion now approved by the bar’s Standing Committee on Legal Ethics represents a compromise between the law of bankruptcy and ethical rules for handling client money.

Generally, lawyers are not permitted to take client money out of trust and pay themselves until they actually have earned the fees.

In a bankruptcy case, however, client money changes character once a bankruptcy petition is filed. All property of the client becomes an asset of the bankruptcy estate when the petition is filed, LEO 1883 said.

That means any part of a prepaid fee left in the lawyer’s trust account no longer belongs to the client. It does not belong to the attorney, either. It is under the control of the bankruptcy trustee, the LEO explained.

That unpaid portion of the lawyer’s fee also creates a conflict between the client and the lawyer, the committee said. The lawyer wants his fee paid in full. The client would rather have the debt discharged so the money could be used to reduce other debts.

The solution, according to the LEO, is for the lawyer to take possession of the entire flat fee immediately before the time of filing the petition.

Most of the work of a Chapter 7 bankruptcy is completed by that point, the committee reasoned.

“Attending a meeting of creditors is typically routine in nature and not time consuming – especially when an attorney is able to make a single appearance on behalf of multiple clients …” the committee said.

Since the fee is largely earned at the time the petition is filed, “an attorney’s fee agreement with the client may identify the filing of the bankruptcy petition as a reasonable ‘benchmark’ for distribution to the attorney of the balance of the advanced, fixed fee…,” the committee said.

LEO 1883 was one of three ethics opinions approved as final by the ethics committee on July 23

Client wants to be an informant

Another LEO confirms that a criminal defense lawyer may lose two clients when one announces he wants to “snitch” on another.

Even though the prosecutor says he has no interest in any such “help” from the would-be informant, the hapless lawyer may be conflicted out for both clients, according to LEO 1882.

In the hypothetical, a lawyer represents Client A and Client B in unrelated criminal matters. Client A tells the lawyer that he has information about Client B’s involvement in the crime he’s charged with. Client A wants to cooperate with the prosecution and offer to testify against B.

The lawyer then tells the prosecutor he may have a conflict because A wants to testify against another of the lawyer’s clients. The prosecutor responds that he is not interested in any information from A, regardless of the information or the accused.

The prosecutor’s disinterest doesn’t save the lawyer from his conflicts, the ethics committee said.

The lawyer cannot advise A on the offer to be an informant because any advice that would further A’s interests would be detrimental to B. The lawyer cannot properly communicate with B because he cannot reveal the important information that A is trying to inform on B.

Withdrawing from either client’s case will not help the situation, the committee said. A’s plan must still be kept confidential, so withdrawing from A’s case still leaves the lawyer unable to represent B.

And if the lawyer withdrew from B’s case, he would still have a duty not to take action adverse to B in the same matter, so he would be barred from assisting A.

The prosecutor’s disavowal of any interest in A’s help does not change the dilemma, because the lawyer would still have an obligation to try to use A’s information in some way to his advantage, the committee said.

Lawyer’s duty to appeal

Finally, the ethics committee clarified the duties of a court-appointed attorney when a client wants to appeal after a guilty plea.

Under current law, a court-appointed lawyer has a duty under Rule 1.4(b) of the Rules of Professional Conduct to advise the client regarding the availability of a petition for appeal, even if it were frivolous and pertains to a conviction based on a guilty plea, the committee said in LEO 1880.

The lawyer can advise the client of the risks of such an appeal.

After advising the client, the lawyer must follow the client’s direction. If the lawyer follows the established procedure for filing appeals considered meritless by the lawyer, the lawyer is not in violation of the ethical rules regarding non-meritorious claims, the committee said.

The legal ethics opinions published by the VSB’s Standing Committee on Legal Ethics are advisory only and not binding on any tribunal.