31 Mar Bankruptcy Attorney Has Duty to Check on Alleged Perfection of Security Interest, Idaho Court Rules
According to an Idaho bankruptcy court, a lawyer has an obligation to check whether a motor vehicle security interest has been properly filed and perfected, based upon new bankruptcy code section 707(b)(4)(D)’s requirement that a lawyer certify, after an “inquiry,” that the information in the bankruptcy papers is correct.
In re Dean, 2008 WL 5683493 (Bky.D.Idaho Dec. 18, 2008), involved married chapter 7 debtors who owned a 2003 Hurricane motor home. The debtors informed their bankruptcy lawyer that they had borrowed money from the wife’s mother in order to purchase the motor home several months earlier. They further stated that they had granted a security interest to the mother to secure repayment of this loan. Becoming wary, the bankruptcy lawyer instructed the debtors to retain another lawyer to ensure that the security interest was indeed perfected.
The debtors later returned to the bankruptcy lawyer and announced that they had contacted the other lawyer; the security interest in the motor home was now filed and perfected. Unbeknownst to the bankruptcy lawyer, the debtors had actually failed to consult the other lawyer due to their concern over his fees. Instead, they had attempted to file the security agreement by themselves. The bankruptcy lawyer checked no further and filed the chapter 7 case.
The chapter 7 trustee later discovered that the security interest in the motor home was not filed or perfected, contrary to the debtors’ sworn schedules. As a result, the trustee took possession of the motor home and auctioned it off for $8,000. The trustee then asked the bankruptcy court to order that the bankruptcy lawyer forfeit his $1,875 fee for inadequately representing the debtors in their chapter 7 case.
In agreeing with the trustee, the court faulted the lawyer for failing to verify that the motor home security agreement had actually been filed, despite his clients’ assurances that it had been done. The court also questioned why the lawyer had not been concerned about the possibility that the trustee would challenge the granting of the security interest as a fraudulent converyance to a relative of the debtor, in the event the security agreement had even been filed.
The lawyer could have taken the minimal step of checking the status of the motor home’s title on the department of motor vehicles’ website, which would have alerted him to the problem, the court observed, but even this simple step was not taken. This ran afoul of section 707(b)(4)(D), based on the lawyer’s failure to perform an “inquiry” into the facts of the case. The court therefore ordered to lawyer to return one-half of his fee, or $937.50, to the debtors, based upon the lawyer’s failure to adequately represent the debtors in the bankruptcy case.
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