CHAPTER 8, B. Client Says "Go," Just Say "No": Ethics and the Automatic Stay

• Jurisdiction: United States

B. Client Says "Go," Just Say "No": Ethics and the Automatic Stay

ABI Journal

June 2019

Jonathan D'Andrea

U.S. Bankruptcy Court (S.D. Ohio)

Columbus, Ohio

Hon. C. Kathryn Preston¹

U.S. Bankruptcy Court (S.D. Ohio)

Columbus, Ohio

One of the most important ethical obligations attorneys owe their clients is the duty of competence: Attorneys must possess the requisite knowledge, skill and preparation reasonably necessary for the representation.² But mistakes happen. As the American Bar Association's Standing Committee on Ethics and Professional Responsibility recently put it, "Even the best lawyers may err in the course of clients' representations."³ Sometimes, however — although less frequently — attorneys intentionally violate the law and their ethical obligations.

The bankruptcy arena is no exception. All attorneys are bound by the rules of professional conduct applicable in their jurisdictions. Attorneys are also bound by various provisions of the Bankruptcy Code, including those imposing the automatic stay.⁴ Most attorneys who venture into the bankruptcy practice arena are well aware of the scope of the automatic stay, and the risks for violating it. However, perhaps less well known is that under general principles of agency law, bankruptcy courts have imposed joint and several liability on creditors and their attorneys for violating the stay. This article discusses the ethical considerations that arise when an attorney violates the stay and offers practice tips.

Cautionary Tale of Alice and Carl

Consider the following hypothetical: Carl Creditor was the holder of a promissory note and a mortgage encumbering Dave Debtor's real property. Dave made payments on the note for several years, but ultimately defaulted. Due to mounting financial difficulties, he decided to file a chapter 7 petition pro se.⁵ Dave's case was dismissed because he failed to file all of his schedules on time.⁶ He immediately filed a second petition, but this time, he timely filed all of his schedules.

After Dave filed his second case, Carl hired his niece, Alice Attorney, to represent him in his bankruptcy case. Alice was recently admitted to the bar and had some experience representing creditors, but she had never practiced before the judge presiding over Dave's case. Nevertheless, she was familiar with the Bankruptcy Code and confident that she could effectively represent Carl. Alice reviewed Dave's case file and advised Carl that the automatic stay expired 30 days after Dave filed his second petition because his first case was dismissed within the preceding one-year period and Dave had failed to file a motion to extend the automatic stay.⁷ Based on Alice's advice that the automatic stay was no longer applicable, Carl asked Alice to file a foreclosure action in state court.

In fear of losing his home, Dave sought the advice of Larry Lawyer — an attorney who regularly represented debtors in bankruptcy. Larry knew something that Alice did not: The judge presiding over Dave's case had previously published an opinion holding that the termination of the stay under § 362(c)(3) operates only with respect to the debtor, not with respect to property of the bankruptcy estate.⁸ Larry knew that the foreclosure action was an act to obtain possession of property of the estate and was therefore a violation of the automatic stay. Armed with this knowledge, Larry filed a motion against Alice and Carl for sanctions pursuant to § 362(k).⁹

Alice Has Exposed Herself and Carl to Significant Legal Liability

While not every court has held that § 362(c)(3) terminates the automatic stay only with respect to the debtor, bankruptcy courts have not hesitated to hold attorneys and their clients jointly liable for willful stay violations. For example, in Bailey v. Davant (In re Bailey), the debtor filed an adversary proceeding against his ex-spouse and her attorney, alleging that they had violated the automatic stay by failing to stop a pre-petition garnishment of the debtor's wages.¹⁰ The court granted the debtor's motion for judgment on the pleadings and held the attorney and ex-spouse jointly and severally liable for violating the automatic stay.¹¹ The court reasoned that an agent is subject to liability to a third party harmed by the agent's tortious conduct.¹² Thus, an attorney, being an agent for his client, who harms a third party on behalf of his/her client will be subject to liability to the third party along with his/her client.¹³

In Gray v. ZB NA (In re Gray), a creditor held a default judgment against the debtors and filed a garnishment action against the debtors in state court.¹⁴ After the debtors filed for bankruptcy, the creditor and its attorney filed a motion in state court requesting the issuance of...