16.5 Practice Considerations
Library | Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.) |
16.5 PRACTICE CONSIDERATIONS
16.501 Pre-Bankruptcy Planning. The efforts made by a debtor, often with the assistance of legal counsel, before the filing of a bankruptcy case to try to obtain the maximum benefits possible from the filing can generally be referred to as "pre-bankruptcy planning." These efforts can assume many dimensions. Ever more popular is an interdisciplinary practice known as "asset protection," which combines tax, estate, and creditors' rights planning. What is possible or appropriate is highly situation-specific and differs significantly depending upon which bankruptcy chapter the debtor expects to use. Also instructive is United States v. Feldman, 156 in which the Third Circuit Court of Appeals analyzes the relationship between fraudulent disclosures, exempt property, and harm for purposes of restitution.
As in most undertakings, planning and preparation usually are necessary not only to obtain a good result but to achieve the maximum benefit possible. This does not mean that every debtor engaging in pre-bankruptcy planning is participating in fraudulent conveyances or committing bankruptcy crimes. In fact, most reorganization advisors suggest that Chapter 11 debtors will have a much greater chance of reorganizing successfully if time is allowed for advance planning. Similarly, a Chapter 7 consumer debtor wants to keep as many assets as possible and obtain a discharge. In such a circumstance, the careful evaluation of all exemptions possible will help maximize the benefits of a Chapter 7 filing.
This is an area where it is best to recall the rule that "pigs get fat and hogs get slaughtered." Inevitably, debtors are looking for ways to place assets out of the reach of creditors or the bankruptcy trustee. There are few ways to accomplish that objective without making a transfer or claiming an exemption. Not only can a debtor put his or her discharge in jeopardy by over-aggressive efforts to maximize the exemptions possible, but much of that conduct may also violate a bankruptcy crime statute. Likewise, in analyzing possible dischargeability issues the practitioner must consider whether what appears to be a problem involving a section 523 exception to discharge may require special care to avoid a criminal charge. 157 Similarly, a practitioner should compare carefully the fraudulent transfer provisions of 11 U.S.C. § 727(a)(2) with 18 U.S.C. § 152(7) when working with a debtor to "plan properly"
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their bankruptcy filing. It is important to recognize that a debtor's legal counsel can be implicated personally in potentially criminal conduct if its advice, efforts, or participation goes "so far" that he or she is "aiding and abetting" the debtor's criminal conduct. 158
Just as certain conduct that may result in denial of discharge may also constitute criminal conduct, where the debtor has been convicted of bankruptcy fraud such conviction is conclusive of the denial of the discharge under 11 U.S.C. § 727(a). 159
16.502 Petition, Schedules, and Statements. The one stage in the life of a bankruptcy case in which the greatest opportunity exists for a debtor and debtor's counsel to expose themselves to possible criminal liability is the completion of the petition, statement of affairs, and schedules of assets and liabilities, which are the essential disclosure documents in any bankruptcy case. For the bankruptcy process to work, there must be complete disclosure of all of the debtor's assets and liabilities and all of the debtor's financial relationships and transactions that might affect the debtor and its creditors. 160 11 U.S.C. § 707 includes an extensive and comprehensive discussion of the attorney's responsibilities to the court when the petition and schedules are filed. 161
It is wise for debtor's counsel to provide the client with a written instruction, preferably signed by the client as having been read and heeded, that emphasizes the critical obligation to list all assets, answer all questions carefully and thoroughly, and comply with all other disclosure requirements. Otherwise, when the Chapter 7 trustee identifies a deficiency in the schedules—one that might constitute a criminal offense—the practitioner will almost certainly be drawn into a "he said, she said" dispute as to what the debtor was supposed to disclose and what the attorney explained. Attorneys
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must be particularly careful as well in these situations because it is a violation of the attorney-client privilege to reveal what advice a practitioner gave a debtor concerning the obligation to disclose all assets and to tell the truth. 162 The limited case law confirms that fairly simple, "immaterial" omissions may be criminal. As the Office of the United States Trustee continues its enforcement efforts, it is almost certain that the convictions relating to this type of conduct will increase in the near future.
The federal bankruptcy courts in Virginia permit "electronic case filing," which provides convenience and flexibility but also imposes duties on the practitioner. Petitions and schedules must still be signed by the debtor-client before they are filed with the court. Originals containing the client's signature "must be retained by the filer . . . ." 163 In In re Wenk, 164 a Richmond attorney was sanctioned for filing a Chapter 7 petition without the debtor's prior signature. While the court's analysis of the situation was limited to violations of the Virginia Rules of Professional Conduct and Rule 9011, the court could have considered the conduct as criminal. The conduct may have satisfied the elements of 18 U.S.C. § 152(2) or (3) because filing the petition without the debtor's prior signature might be considered a false oath or "false declaration, certificate, verification, or statement." In a more recent decision, that is precisely what the bankruptcy court did. In In re Hill, 165 the debtors failed to disclose certain bank accounts, and the court sanctioned debtors' counsel after concluding that the attorney's
conduct and actions incident to the 341 Meeting, and before the Court, were in significant material respects, misleading, intentionally dilatory and obstructive, and undertaken for the improper purposes of (i) obstructing the Chapter 7 Trustee's, and the Court's, legitimate inquiries to determine the
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truth, (ii) causing confusion and delay, and (iii) further concealing the truth. 166
Before anyone assumes that Hill involved the most extreme—once in a lifetime—facts, consider that the attorney's defenses or excuses were that he personally questioned the debtors about all aspects of the schedules and statement of affairs, the debtors signed them under oath, the attorney advised the trustee of the...
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