Maryland Bar Bulletin
Publications : Bar Bulletin : March 2005

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MSBA Opposes Harsh Federal Liability Standards Proposed for Bankruptcy Lawyers
By Janet Stidman Eveleth

Proposed federal liability standards which are harsh and detrimental to this country’s bankruptcy attorneys have been opposed by the Maryland State Bar Association (MSBA) and the American Bar Association. If enacted, these standards will hold debtors’ attorneys personally liable for the accuracy of their clients’ schedules, force them to hire private investigators and appraisers and invoke harsh liability standards on debtors’ attorneys who do not conduct a lengthy investigation and appraisal of the client’s assets. Ultimately, MSBA fears this proposed legislation will harm bankruptcy attorneys and their clients, attorneys who work for legal aid and legal services programs and pro bono bankruptcy attorneys.

On February 1, 2005, Iowa Senator Charles Grassley introduced sweeping bankruptcy-reform legislation in S. 256 which will dramatically increase the liability and administrative burdens of bankruptcy attorneys under the Bankruptcy Code. It will require bankruptcy attorneys to (1) certify the accuracy of the debtor’s bankruptcy schedules, under penalty of harsh court sanctions; (2) certify the debtor’s ability to make payments under a reaffirmation agreement; and (3) identify, advertise and conduct themselves as “debt relief agencies” subject to a host of new intrusive regulations.

On February 22, MSBA’s Board of Governors voted to oppose this measure. These proposed standards could force many debtors’ bankruptcy attorneys from this area of law practice, leaving thousands of debtors without legal representation. In addition, it is a major obstacle for pro bono bankruptcy attorneys as well as legal aid attorneys and those working with LSC-funded programs.

By holding debtors’ attorneys personally liable for the accuracy of their clients’ schedules, this measure would require attorneys to hire private investigators and appraisers to independently verify the existence and value of all the client’s assets, adding thousands of dollars to the cost of representing a debtor in bankruptcy. Most debtors can’t afford these new expenses, so thousands of pro se debtors will likely clog up court dockets.

Further, these provisions will invoke harsh new liability standards for debtors’ attorneys who do not conduct a lengthy investigation and appraisal of the client’s assets – very costly steps for attorneys. If this is not done and the Chapter 7 petition is dismissed or converted to a Chapter 13, the court could then impose harsh sanctions and civil penalties on the attorney personally. Plus, most malpractice carriers are expected to exclude this new liability from their coverage.

“This legislation unfairly reallocates the responsibility for the accuracy of information within the debtor’s sworn bankruptcy schedules from the debtor to the attorney and requires the attorney to serve simultaneously as information ‘verifier’ and client advocate,” asserts Alan J. Belsky, Chair of MSBA’s Consumer Bankruptcy Section. “Attorneys will no longer be able to take clients for their word on such things as the value of certain personal property or other information that cannot be objectively verified without the incurrence of undue time and expense.”

In addition, Belsky predicts that “fees and expenses will certainly increase with the adoption of S.B. 256, which will have the incidental effect of making bankruptcy relief unaffordable to many who are already barely able to muster the money together to file for bankruptcy. In terms of pro bono representation, attorneys may be unwilling to take on cases where providing free legal ‘services’ may not be enough to satisfy the requirements of S. 256.”

Belsky further cautions, “S.B. 256 will unfairly require debtors’ attorneys to advise potential clients that they are offering ‘debt-relief services’. The bankruptcy courts are already inundated with bankruptcy petitions filed by the so-called ‘non-attorney preparers’ who offer paper preparation services but cannot assist clients in court or other important legal proceedings. Attorneys offer far more than the debt-relief services offered by the non-attorney preparer. Requiring debtors’ attorneys to represent themselves as providing debt-relief services demeans the true nature and scope of their representation.”

If this legislation is enacted, many attorneys will stop representing debtors in bankruptcy and they will no longer be willing to accept pro bono bankruptcy clients. Therefore, the BOG considers this legislation harmful to the legal profession and the public. MSBA has announced its opposition to S. 256 and conveyed it to Maryland’s two U.S. Senators. For details, refer to http://www.abanet.org/poladv/priorities/brattyliabilityfactsheet_109thCongress.pdf.  

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Publications : Bar Bulletin: March, 2005

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