Bankruptcy Fraud: “Your Cheatin’ Heart”

17 Jun Bankruptcy Fraud: “Your Cheatin’ Heart”

Bankruptcy fraud is an important issue. And there’s no shortage of posts here at Bankruptcy Law Network warning of the evils of cheatin’ the bankruptcy system.

Craig Andresen, Bloomington, Minnesota bankruptcy attorney and BLN member, recently published an intriguing post entitled, “No, A Bankruptcy Lawyer Should Not Withdraw from the Case if the Client Won’t Tell the Truth.” Craig argues that, despite the urge to withdraw when a client engages in a fraud, the bankruptcy lawyer should remain in the case to counsel the client to make the right choices. In short, the “attorney and counselor at law” needs to put on her counselor hat. As Craig explains:

The lawyer’s impulse to withdraw from the case of a bankruptcy client who has lied to the court should be resisted. This is the moment the client truly needs the lawyer’s advice, where the lawyer can help change the course of the client’s life. Obviously, there is no way for the lawyer to help the client if the lawyer withdraws from the case. Instead, the lawyer should start out knowing that when confronted with an untruthful bankruptcy client, the client is going to decide, after consulting with the lawyer, to tell the truth to the court. If this is the lawyer’s approach, it is unlikely he or she will ever have to withdraw from a bankruptcy case based on the client’s untruthfulness.

Craig’s post got the attention of law professor Nancy Rapoport of the University of Nevada, Las Vegas. (As a side note, I should point out that Professor Rapoport is also an avid ballroom dancer, but I’ll avoid ballroom dancing in this post just as I do in real life.)

Professor Rapoport reacted to Craig Andresen’s post with skepticism, reasoning as follows:

My problem with this concept is that I don’t think that people who lie intentionally are going to be persuaded to become honest. (See an earlier article I wrote about this topic here).

Although it’s possible that a lawyer’s ‘force of personality’ may help a client whose honesty is wavering to see the light, I think it’s equally possible for a lawyer to persuade herself (wrongly) that she has won over the obstinately lying client. That lawyer may well find herself the product of a disciplinary action later.

So what’s a bankruptcy lawyer to do? Stay in the case and counsel the client to do the right thing? Or would the lawyer’s decision to use “force of personality” likely result in the lawyer just getting drawn into the fraud as Professor Rapoport suggests?

The lawyer’s conduct is governed by Rule 3.3(b) of the Model Rules of Professional Conduct, which provides: “A lawyer who represents a client in an adjudicative proceeding and who knows that a person intends to engage, is engaging or has engaged in criminal or fraudulent conduct related to the proceeding shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal.” (emphasis added).

As with so many difficult issues, the lawyer’s response must be governed by facts of the case. The ethics rule has a “past, present, and future” component (“intends to engage, is engaging or has engaged”). The difference in approaches urged by Professor Rapoport and Attorney Craig Andresen doesn’t result so much in a difference of opinion as it does a difference in focus on the various stages in client’s conduct.

Craig Andresen’s post is concerning fraud already committed (“what the lawyer should do if the bankruptcy client tells the lawyer that something in the bankruptcy papers is false, because the client has intentionally concealed something from the court”). He’s examining the back end of the problem–what the lawyer should do after the fraud has occurred. Professor Rapoport, on the other hand, is examining the front end of the problem–the client who wants to commit fraud and who is “wavering to see the light.”

Both are right. To be sure, many clients bent on committing fraud or criminal activity won’t be won over by their lawyers. Pitfalls abound. Red flags are a flyin’.

But if the client has already committed the fraud, not only must the attorney not withdraw, he must take “reasonable remedial measures” to rectify the fraud, including notifying the court. Because the lawyer has a duty to tell the court anyway, Craig Andresen is right to urge lawyers in these situations to counsel their clients to come clean. After all, the court will find out one way or another. The “we can do this the easy way or the hard way” talk is not only appropriate, it’s mandatory. If, after being counseled to disclose the fraud, the client won’t come clean, then the bankruptcy lawyer must disclose the fraud to the bankruptcy court and should, of course, withdraw. So even if the client’s cheatin’ heart won’t tell on him, his lawyer certainly must. Silently withdrawing from the case is not an option after the lawyer discovers the client’s fraud on the bankruptcy court.

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Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer who represents consumer debtors in Chapter 7 and Chapter 13 bankruptcy. He is the author of the Charleston Bankruptcy Blog. He is also a member of the South Carolina Bankruptcy Blog. He files bankruptcy cases for clients in the Charleston, South Carolina division, which runs from Myrtle Beach to Beaufort. The DeMott Law Firm also represents clients in foreclosure defense and mortgage modification. You can also connect with Russ on Google Plus Russell DeMott. Russ can be contacted directly at (843) 695-0830 or by email at russ@demottlawfirm.com.
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