ten commandments of ethical collections chapter 11

TEN COMMANDMENTS OF ETHICAL COLLECTIONS

JOHN MAYER Ross, Banks, May, Cron & Cavin, P.C.

2 Riverway, Suite 700

Houston, Texas 77056

Phone 713-626-1200

Fax 713-623-6014

[email protected]

State Bar of Texas

13th

ANNUAL COLLECTIONS &

CREDITORS’ RIGHTS

May 14-15, 2015

Dallas

CHAPTER 20

mailto:[email protected]

AUTHOR

John Mayer is a shareholder in the firm of Ross, Banks, May, Cron & Cavin, P.C., Houston, Texas where he has practiced law since 1973 in the areas of collections and commercial litigation. He is a graduate of the University of Texas School of Law, and is certified in Civil Trial Law by the Texas Board of Legal Specialization and has been so certified since 1989. He is a frequent speaker on creditors’ rights. His resume and a list of articles authored may be viewed at www.rossbanks.com.

http://www.rossbanks.com/

Ten Commandments of Ethical Collections Chapter 20

TABLE OF CONTENTS

Page 1. BEFORE YOU START, GET THE CREDITOR TO SIGN A GOOD 1 WRITTEN CONTINGENT FEE CONTRACT 2. BE CAREFUL ABOUT HOW YOU MAKE DEMAND FOR PAYMENT 1 3. AVOID CONFLICTS OF INTEREST 2 4. PRESERVE THE CREDITOR’S CONFIDENTIAL INFORMATION 4 5. ALWAYS BE TRUTHFUL TO THE JUDGE 5 6. DON’T TAKE THE CLIENT’S MONEY WITHOUT EXPRESS AUTHORIZATION 6 7. REPORT ALL ACTIVITY PROMPTLY TO THE CLIENT OR FORWARDER 7 8. SUPERVISE ASSOCIATES AND STAFF 8 9. DON’T LET ANYONE CHILL THE BIDDING 10 10. DON’T BUY CLAIMS 11

Ten Commandments of Ethical Collections__________________________________________________________________________________________________________________Chapter 20

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TEN COMMANDMENTS OF ETHICAL COLLECTIONS

By John Mayer Attorneys at Law

Ross, Banks, May, Cron & Cavin, P.C. 2 Riverway, Suite 700 Houston, Texas 77056

Phone 713-626-1200 | Fax 713-623-6014 Email [email protected] | Web www.rossbanks.com

INTRODUCTION

This paper offers practical advice about questions of ethics that arise in a collections practice for which the law offers little guidance.

1. BEFORE YOU START, GET THE

CREDITOR TO SIGN A GOOD WRITTEN CONTINGENT FEE CONTRACT.

Required by Texas Rules of Professional Conduct.

When you have not regularly represented the client, the basis or rate of the fee must be communicated to the client in writing. Texas Rules of Professional Conduct 1.04(c). Contingent fee agreement must be in writing, state the percentage fee, and be signed by the client. Texas Rules of Professional Conduct 1.04(d). Forwarder’s Cut

Many forwarders don't want you to know their contingent percent. They fear that, if the creditors whom they represent know your percent contingency, they might cut out the forwarder and send claims to you directly. Always communicate questions or comments about contingent rates or commissions only to the forwarder, not to the client.

Minimum Fees

The State Bar made attempts to establish minimum fees, but those attempts were not successful. In 1961 the State Bar of Texas provided its members with a Recommended Minimum Fee Schedule. Its

introduction stated: “If any lawyer in other than charity cases habitually charges less than the applicable minimum fee (of the local or district bar association) he may be guilty of solicitation of business on the basis of price. This is a violation of the canons of ethics.” Ethical Opinion 311 was issued by the State Bar in January 1966 stating “Habitual charging of fees less than those established in a recommended minimum fee schedule does not violate the Canon regarding fixing fees but might be evidence of unethical solicitation.

Referral Fees

Referral fees are regulated in some states. In Texas, a lawyer may not receive a referral fee unless pursuant to a written contract signed by the client and the lawyer performs some actual services for the client. Texas Rules of Professional Conduct 104(f). 2. BE CAREFUL ABOUT HOW YOU

MAKE DEMAND FOR PAYMENT. Communication with a Debtor Who is Not Represented by an Attorney In dealing on behalf of a client with a person who is not represented by counsel, a lawyer may not state or imply that the lawyer is disinterested. Texas Rules of Professional Conduct 4.03. You must make it clear that you are representing the creditor. A lawyer may not communicate or cause or encourage another to communicate about the subject of the representation with a person or organization the lawyer knows to be represented by another lawyer, unless he has the consent of the of the other lawyer to


mailto:[email protected]

http://www.rossbanks.com/

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do so. Texas Rules of Professional Conduct 4.02. If the debtor says that he has a lawyer, you must immediately stop talking to the debtor except to ask for the name and phone number of his lawyer, and thereafter deal only with his lawyer. Keep in mind all of the limitations of the Federal Fair Debt Collection Practices Act when you are talking with a debtor. Also consider that he may record the conversation. Email Email has become the standard method of business communications. If you know the debtor’s email address, making demand for payment by email is as good as by US mail, and a lot faster and more certain to be received. Compliance with the Federal and State debt collection practices act is a must. If it is a consumer debt and the email is your first communication, you must include the FDCPA validation notice.0 People treat email as casual conversation, but they are not. Email is forever. Email can always be retrieved from somebody’s server or backup tapes. The District Attorney of Harris County, Texas, Chuck Rosenthal, lost his job because he allegedly put racist and sexist remarks in casual e-mails to his executive secretary. The emails came to light when he was ordered to produce all e-mails in discovery in a federal court civil rights lawsuit brought by two men who were arrested for video-taping sheriff’s deputies drug raid at a neighbor’s home. He was also sanctioned for deleting e-mails. Harris County settled the case for $1.7 million. Facebook, Twitter and other Social Media Can you “friend” a debtor on Facebook? Can you send demands and other communications to a debtor by Facebook, Twitter or other social media? All of the rules of the FDCPA apply equally well to communications over the internet. The FDCPA requires that you correctly identify yourself in all communications with the debtor. 15 U.S.C. § 1692b. You can’t “friend” the debtor by using a name which is not your own. And you would have to give the FDCPA validation notice required by 15 U.S.C. § 1692g.

Facebook and Twitter and other social media have the additional problem that communications to the debtor are not private. Third parties will see the communications. Remember what happened to Anthony Weiner. All of the rules of the FDCPA and state collection laws that restrict communications to third parties apply to social media. Recording Conversations with the Debtor and Opposing Counsel Can you record a conversation with the debtor or with the debtor’s lawyer without telling him that you are recording the conversation? The rule differs from state to state, but, there is nothing under the federal wiretap statutes which prohibit this, provided that the person who makes the recording is a party to the conversation. Goldman v. United States, 316 U.S. 129, 62 S.Ct. 993, 86 L.Ed. 1322 (1942); United States v. Murray, 492 F.2d 178. 194 (10th Cir. 1973), cert. denied 419 U.S. 854, 942, 95 S.Ct. 98, 210, 42 L.Ed.2d 87, 166. In Texas, a recording made by one party to conversation is admissible evidence and may not be excluded on the ground that the other party did not know that the recording was being made. Seymour v. Gillespie, 608 S.W.2d 897 (Tex. 1980). It is not unethical for a lawyer to secretly record a telephone conversation to which he is a party. Texas Ethics Opinion No. 595 (2006). Bona Fide Error is Not a Good Defense. Attorneys can’t use the defense that they made a bona fide “legal error” to try and avoid liability when sending a collection letter. In a 7-2 ruling the U.S. Supreme Court stated that there was no mistake of law defense to debt collectors for violating the FDCPA. Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich, 08-1200, Opinion delivered April 20, 2010. 3. AVOID CONFLICTS OF INTEREST Always Do a Conflicts Check. Forwarders don't recognize conflicts of interest. The same forwarder may send you claims by and against the same company.


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Representing Multiple Creditors Against the Same Debtor. Conflicts of interest may arise between clients for whom you are suing the same debtor. If you obtain judgments against the same debtor on behalf of two or more creditors, which do you collect first? If you send writs of execution to the constable for levy on the debtor’s assets, the constable must levy in the order in which he receives the writs. In that situation, you may have an ethical problem. It is an ethical violation to use a writ of execution on one judgment to collect for another creditor whom you also represent. Disclosure of representation of multiple creditors in the same chapter 11 bankruptcy is required and must be filed with the court. Fed.R.Bankr.P. 2019. Conflicts of interest may arise from dual representation of a corporate client and an officer of the corporation. This is not prohibited in state court, unless there is an actual conflict of interest, but is prohibited in Bankruptcy Court. A lawyer may not represent both a bankrupt corporation and officers or shareholders of the corporation. In re Cerberus Capital Mgmt., LP., 164 S.W.3d 379 (Tex. 2005). Conflicts of interest may arise from dual representation of corporate client and parent or subsidiary corporation, if one of them is insolvent. Once a corporation becomes insolvent, the officers and directors owe fiduciary duties to the corporation’s creditors. Henry I. Siegel Co., Inc. v. Holliday, 663 S.W.2d 824, 827 (Tex. 1984); Waggoner v. Herring-Showers Lumber Co., 120 Tex. 605, 40 S.W.2d 1 (1931); World Broadcasting System, Inc. v. Bass, 328 S.W.2d 863 (Tex. 1959). Using Rights of One Creditor to Benefit Another Creditor. If you represent more than one creditor against the same debtor, you may not use the rights of one creditor for the benefit of another. For example, you may not refuse to release a garnishment obtained for one judgment creditor unless the debtor pays another creditor whom you also represent.

Using Rights of A Creditor to Benefit Yourself. You may create a conflict of interest if you take advantage of something which properly belongs to the client. For example you cannot make a personal bid for property sold at an execution sale upon your client’s judgment. If something is going to be sold at a bargain price, find a legitimate buyer. Guaranty of Fees May Create a Conflict of Interest A creditors’ lawyer in Dallas got into a curious conflict of interest situation in a suit to avoid a transfer of assets in fraud of the rights of creditors. He filed a lawsuit on behalf of the creditor who was his client, and his fee agreement was an hourly fee arrangement. While the lawsuit was in progress, the debtor filed for bankruptcy under Chapter 7 of the Bankruptcy Code and a trustee was appointed. By virtue of the trustee’s avoidance powers, all state law causes of action for avoidance of transfers of assets in fraud of the rights of creditors belong solely to the trustee. So, the lawyer switched hats and the trustee filed an application to hire the attorney to continue the lawsuit as counsel for the trustee, to be compensated under the Bankruptcy rules as attorney for the trustee. Unknown to the trustee, the lawyer had an agreement with the creditor to continue to pay him on an hourly fee basis to pursue the lawsuit in the name of the trustee, and the lawyer continued to bill the creditor for the work he did on behalf of the trustee. After some time passed, the trustee made an agreement to settle the fraudulent transfer suit. The original creditor objected to the amount of the settlement. After a hearing the judge approved the settlement, and the creditor appealed. During all of this time, the lawyer was billing the creditor for the work he did on behalf of the trustee in opposing the creditor’s appeal of the order approving the settlement. So, the creditor was actually paying the lawyers on both sides of the appeal. It all came out when the creditor got tired of paying the lawyer’s bills and the lawyer quit working the case. The opinion states: “There is enough here to connect the dots. And it is not pretty. ... The various nondisclosures and conflicts of interest attributable to the Creditor ... and its counsel (at both the bankruptcy court level and throughout much of a


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multi-month appeal) were so serious, so improper, and so demonstrative of callous indifference to applicable duties and ethical standards, that the entire Adversary Proceeding has been tainted.” The judge dismissed the fraudulent transfer suit with prejudice for abuse of judicial process attributable to the creditor and its lawyer. In re Moore, 470 B.R. 414, 436 (Bankr. N.D.Tex. 2012, reversed 5th Cir. 2014). Conflicts Between Principal Owners and Other Owners of Corporations and LLCs In the case of Leonard v. Luedtke, (In re Yorkshire LLC) 540 F3d 328 (5th Cir. 2008), an individual representing himself as the company president and sole manager filed bankruptcy petitions on behalf of two related companies. None of the other officers, owners, employees or creditors were informed prior to the filing. The individuals who had previously exercised almost absolute authority over the corporate affairs requested sanctions against the manager and the attorney. The Court found that the manager was not entitled to authorize the filings and they were filed in bad faith. It further found that the attorney had not conducted an investigation of the authority of the manager and the interest of the attorney filing the matters was aligned with the manager. As sanctions the Court ordered the attorney to pay $40,000 and the manager to pay $50,000. 4. PRESERVE THE CREDITOR’S

CONFIDENTIAL INFORMATION A lawyer must not knowingly reveal confidential information of a client or a former client, subject to certain exceptions. Texas Rules of Professional Conduct 1.05 This duty applies to collection cases. For example, a provision in a form contract which violates some rule or regulation, or that the creditor routinely violates some provision of the Debt Collection Practices Act, and identifying or disclosing the illegal contract provision or illegal debt collection practice would expose the creditor to penalties in multiple transactions. Sometimes it is prudent to settle or withdraw a lawsuit to avoid disclosure of bad facts which could harm the creditor if disclosed.

While preserving client confidences and asserting the attorney client privilege, guard against the possibility that it might be waived or lost. Your client may waive the attorney client privilege, but the privilege belongs to the client, not to the lawyer. The attorney-client privilege is waived by the client's voluntary communication of the subject matter. In re Pequeno, 126 Fed.Appx. 158 (5th Cir. 2005); In re Mudd, 95 B.R. 426 (Bankr. N.D.TX. 1989). Inadvertent Waiver You can waive the attorney client privilege by producing a privileged communication in response to a request for production of documents. Always make a personal review of documents to be produced and always segregate privileged documents and prepare a privilege log. Don’t put anything in your time and billing records that might reveal a confidence. If your billing records should ever become evidence in a lawsuit, you don’t want to have to explain why you redacted them. Settlement Authority This duty also applies to settlement authority. There may be a difference between what amount the creditor authorizes you to propose and what amount the creditor would be willing to accept. If the creditor instructs you to offer a specific dollar amount, you cannot ethically disclose that they might take less. Your Client May Waive the Privilege Remember what happened to Arthur Andersen & Co. Arthur Andersen was convicted of obstruction of justice based upon an in house counsel’s editing of a press release about Enron that qualified and toned down and softened some negative information. That is what corporate counsel do, but in light of the immensity of the fraud and the collapse of Enron that occurred not long thereafter, the jury saw it as altering a document to conceal negative information from investors. It came to light because Arthur Anderson waived the attorney client privilege. Although the Supreme Court eventually overturned the conviction and dismissed the case, the firm was ruined. In bankruptcy, the trustee has the power to


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waive the attorney client privilege of the bankrupt debtor. Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343, 105 S.Ct. 1086, 1996, 85 L.Ed.2d 372 (1985) (corporation); U.S. v. Camptell, 73 F.3d 44, 47 (5th Cir. 1996) (limited partnership); In re Smith, 24 B.R. 3, 5 (Bankr.S.D.Fla 1982) (individual person); In re Bazemore, 216 B.R. 1020, 1025 (Bankr. S.D.Ga. 1998) (individual person). 5. ALWAYS BE TRUTHFUL TO THE

JUDGE Duty of Candor to the Court Lawyers owe a duty of honesty and candor toward the tribunal as a matter of professional ethics. I have seen lawyers get into trouble for being less than honest in statements to a judge. You have a duty to uphold the integrity of the legal system. If you discover after the fact that your client made a false oath or caused you to offer as evidence a document that was forged or altered, you must advise the client that the false testimony or false document must be disclosed to the court. If the client won’t allow you to make the disclosure, then you must withdraw from further representation, without informing the court of the deception. You owe a duty to the client not to disclose the fact that the client gave false testimony or presented a forged or altered document, but you also owe a duty to the court not to permit the client to use the false oath or false document as evidence in the case, and you must withdraw from further representation of the client in the case. False Representation of Authority An attorney falsely stated to a state court judge that the attorney was seeking an injunction on behalf of a bankruptcy trustee, when in fact he had not been employed by the trustee. Notwithstanding that the automatic stay of the Bankruptcy Code furnished the injunctive relief that the lawyer was seeking, he was disciplined for the false representation. McIntyre v. Commission for Lawyer Discipline, 169 S.W.3d 803 (Tex. App.– 2005, petition stricken, review denied).

Drafting Affidavits for Clients Which They Cannot Support on the Witness Stand Don’t put statements into your client’s affidavit without questioning him as to whether he really has knowledge of the facts stated in the affidavit. Problems result from using form affidavits. If the lawsuit is contested, he may be cross examined as to the basis for knowing what he swore to in the affidavit. If he can’t back it up on the witness stand, you’re in trouble. False Oath By "/S/” This is how a lawyer got into trouble for using “/s/” signatures. The procedures for electronic filing permit use of symbols in place of pen signatures in this convention: "/s/ (name).” Documents prepared by word processing software and filed electronically may be signed that way rather than printed on paper, signed in pen and scanned on a scanner. Local rules of most state and federal courts follow this convention. It is easy to just put an “/s/” on the client’s signature line rather than have him come in to the office to sign it in pen. Why not just ask the client to give you verbal authorization over the phone to sign it for him with an “/s/”? If you don’t have his pen signature on the document, he might not back you up if the document is challenged. A lawyer filed documents with an "/s/" indicating that his client signed it on pain of perjury. During a contested hearing, an opposing attorney during cross examination confronted the client with the document to impeach his testimony. The client would not confirm that he in fact signed the document and would not agree that the statements in the document were true. “That’s just something my lawyer prepared.” The lawyer was accused of making a false verification in violation of 18 U.S.C. Section 152(3). The judge sanctioned the lawyer for filing a false oath and barred him from appearing in any case in the Bankruptcy Courts for the District. In another case lawyers filed sworn declarations in support of an application for a temporary restraining order signed by witnesses this way: “Executed (date) /s/ (typed name)”. The judge


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granted the TRO based on these affidavits. The attorneys subsequently sought to substitute sworn statements of the witnesses signed in pen. But the date on affidavits signed in pen was after the date on which the judge signed the TRO. The attorneys were fined $3,000 per “/s/” and barred from practicing in the Northern District of Texas for time periods up to 6 months. American Airlines, Inc. v. Allied Pilots Ass’n, 968 F.2d 523 (5th Cir. 1992). Failure to Disclose Non Lawyer Involvement, Services and Fees A case in which lawyers were sanctioned for errors routinely and repeatedly committed by their non-lawyer staff is In re Zuniga 332 B.R. 760 (Bankr S.D. Tex. 2005). A California credit counseling firm procured debtors for a California attorney and then obtained local counsel in Texas to file the debtor’s bankruptcy petitions. Judge Jeff Bohm found that a list of ethical and Bankruptcy Code violations had been committed. Included were the following. There was a failure to disclose the credit counseling firm’s involvement in procuring and transferring a $1,199 fee to the California law firm and failure to accurately disclose compensation. Neither attorney was admitted to practice in the district. Under Texas law, the California attorney had engaged in the unauthorized practice of law as had local counsel. Neither attorney kept the Debtor informed about her case. The fee received by both attorneys was unreasonable. Both attorneys violated the Texas Disciplinary Rule requiring candor toward the tribunal. Both lawyers made false or misleading communications regarding services. The credit counseling service engaged in the unauthorized practice of law. The Court ordered disgorgement, sanctions, payment of attorney’s fees and a show cause hearing for further findings and possible sanctions. Multiple Bankruptcy Cases for Same Debtor Among the findings of the Court in a 23 page unpublished opinion dated August 27, 2007, In re Red Lion Lake Dallas Club, Inc., Case No. 05-49039, U.S. Bankruptcy Court, Eastern District of Texas, Sherman Division, were the following. Some fourteen cases were filed by the principal of the debtor or his ex-wife

or entities controlled by him since August 2002 using a variety of aliases. Nine were dismissed, three dismissed with prejudice, two were still pending, two resulted in a discharge, and one was closed as a corporate “no asset” case. The debtor’s attorney was involved in all but one of the cases. In 2004, one of the principals had been sanctioned for testifying falsely to the Court. On November 29, 2006, the principal and the attorney had been sanctioned by Judge Houser, the Chief Bankruptcy Judge for the Northern District of Texas. Judge Houser found the attorney had allowed the Debtor to file schedules he knew or should have known were materially false and inaccurate; he facilitated an abuse of the bankruptcy process; and he failed to act in accordance with his responsibilities under the Texas Disciplinary Rules of Professional Conduct and as an officer of the court. The attorney had also been previously sanctioned by the court for prosecuting simultaneous Chapter 7 and 13 cases for the same debtor. He was also sanctioned for filing a new chapter 7 case within a 180 day period for a debtor whose chapter 13 case had been dismissed with prejudice for 180 days, although the new chapter 7 case was purportedly filed and prosecuted by the debtor’s wife pro se, the case was actually handled by the attorney. The attorney failed to follow numerous other instructions from the court. Judge Rhoades found the attorney facilitated the abuse of the bankruptcy process; filed a frivolous pleading; acted in bad faith; caused substantial effort and costs as a result of his misconduct; and injured the integrity and operations of the Court. The Court went on to impose substantial sanctions. 6. DON’T TAKE THE CLIENT’S MONEY

WITHOUT EXPRESS AUTHORIZATION TO DO SO.

Duty to Segregate Clients Funds The rule in Texas is that a lawyer must hold funds and other property belonging in whole or in part to clients or third persons separate from the lawyer’s own funds and property. Texas Rules of Professional Conduct 1.14. Lawyers must maintain a separate bank account designated as a trust account for receipt of client funds and deposit into the trust account


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advancements to pay court costs, retainers, and debtor checks or payments on claims. In our practice we put client advancements to enable us to pay court costs into the trust account and write checks to pay the filing fees and court costs out of the trust account. When a check is received from the debtor in payment upon a collection matter, it is deposited into the trust account. After sufficient time has passed to be sure that the check will not be dishonored, then I transfer funds out of the trust account to pay my contingent fee or commission and write a check for the difference and mail it to the forwarder or to the client if there is no forwarding collection agency. Failure to segregate and to account for client funds is a frequent matter of lawyer discipline. In one case, a lawyer was sanctioned for depositing the settlement of a lawsuit into his operating account rather than into his trust account, and ordered to make restitution and pay the grievance’ committee’s fees. He paid the grievance committee with a check drawn on his trust account, and was additionally sanctioned for that, since the fees should have come from his personal funds. If You Nudge the Deal, Can You Keep the Nudge? If you settle a claim and nudge the deal and collect more than the client authorized you to accept, can you keep the difference and apply it to your attorney’s fees? A typical collection matter is handled on a contingent fee agreement, plus the client’s agreement to pay all court costs and out of pocket expenses, plus an assignment of any court awarded attorney’s fees. If you nudge the deal, can you take commissions on the amount which the client authorized you to accept and apply 100% of the surplus over that amount to attorney’s fees? Can you Keep Unexpended Cost Advancements When the Case is Closed? Can you keep the unexpended cost advancement when the matter is closed? A typical contingent fee agreement requires the client to send you an advancement of funds to enable you to pay the court costs and service fees. If at the time you close the matter there is some small amount of the court

cost advancement remaining, which was not recovered and returned to the client, can you keep it? It may not be much on each matter, but in a volume practice can add up. Can You Keep Abandoned Receipts? Sometimes a recovery is made on an old judgment and when you attempt to contact the client, you find that the client is out of business and there is no successor and no one to receive the money. If the money is truly abandoned, can you keep it? This happened to me on a $20,000 collection where the creditor had gone through a Chapter 7 liquidation. There were so many allowed claims that the trustee did not want to reopen the estate to make a distribution out of the $20,000, since the costs of making the distribution would be prohibitive. No You Cannot Keep the Money. I don’t know of any law on point on any of these question, but in my opinion, I don’t think so, at least, not without full disclosure to the client and the client’s express consent. Otherwise, you are self-dealing with client funds. 7. REPORT ALL ACTIVITY PROMPTLY

TO THE CLIENT OR FORWARDER. Whenever You Do Anything On a File, Report. A lawyer must keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information, and must explain a matter to the extent reasonably necessary to permit the client to make informed decisions. Texas Rules of Professional Conduct 1.03. Report All Settlement Offers. This duty applies to clients and forwarders. It requires that you make full disclosure of all offers of settlement made and received. When Dealing Through a Forwarder or Collection Agency, Do Not Report Directly to the Client. Forwarders and collection agencies are jealous of the client contact. Communicating through a forwarder may interfere with compliance with the


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duty to keep the client informed. Often forwarders and collection agencies require that the lawyers, to whom they send debt collection claims, communicate only with the forwarder, and forbid the lawyer from communicating directly with the client. They fear that you may develop a relationship with the client and the client may send their business directly to you and cut out the forwarder. Some will cut you off completely if you have any direct communication with the client. Sometimes you have an emergency which requires direct communication with the client, such as you need a witness for an emergency hearing. Contact the forwarder first, if possible, and tell them why you must communicate directly with the client. But do what you have to do to protect the client’s interests. Your duty of loyalty is to the client. When should you ask the forwarder for permission to communicate directly with the client? (1) to find out information needed to respond to a defense or counter claim, (2) to obtain information to respond to discovery requests, prepare affidavits, and prepare a witness to testify at trial, and (3) to conduct a deposition of the client’s representative or to conduct the trial of the case. Departments or offices of super-size client, such as large money center banks and giant corporations, may be territorial, and that can interfere with communications. It has happened to me that events such as the debtor filing for bankruptcy may cause responsibility to shift from one department to another, and the department from which you need to get documents and witnesses quits co-operating with you. Report Bad News Promptly. Your duty to keep the client informed requires prompt disclosure of bad news. This is often an emotional roadblock for lawyers. But, the best practice is to disclose bad news right away and don’t put it off in the hope that you might be able to make it better before the client finds out. 8. SUPERVISE ASSOCIATES AND STAFF If Someone Gets Disciplined, It Will Be You. A partner in a law firm or supervising lawyer

is subject to discipline because of unethical conduct of a lawyer for whom he has direct supervisory authority, if he knows of the associate’s misconduct and fails to take reasonable remedial action to avoid or to mitigate the consequences. Texas Rules of Professional Conduct 5.01. A lawyer having direct supervisory authority over a non-lawyer shall make reasonable efforts to insure that the non-lawyer’s conduct is compatible with the professional obligations of the lawyer, and the lawyer is subject to discipline for the conduct of the non-layer if the lawyer orders or permits the conduct or the lawyer knew of the misconduct by the non-lawyer and fails to take reasonable remedial action to avoid or mitigate the consequences. Texas Rules of Professional Conduct 5.03. Things To Do To Cope With These Duties. (1) Have a written statement of policy which includes

compliance with all applicable debt collection practices laws, and make them sign it.

(2) Frequent supervision. (3) Eavesdrop periodically on the employee’s phone

and email. (4) Deal with any complaints promptly and hand out

appropriate discipline and make any required restitution.

(5) Don't let staff or other lawyers use your court logins or passwords for electronic filing. Your login is the equivalent of your signature.

Volume Processing Issues This is an issue for attorneys who generate mass produced filings from computer data, to file and process collection suits, replevins, mortgage foreclosures, file bankruptcy proofs of claim and bankruptcy lift stay motions, and the like. Judge Jeff Bohm of the Southern District of Texas disciplined a law firm that mass processed bankruptcy filings for violating the rule requiring candor to the court. The fee applications contained canned descriptions of the attorney's services which were duplicated in case after case. In re Zuniga, 322 B.R. 760 (Bankr. S.D.Tex 2005). Another case concerns a law firm that mass produced proofs of claim for a large debt buyer from


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computer data. The problem was that they never attached any documents to the proofs of claim unless an objection was filed. The proofs of claim were legally insufficient without any supporting documents or business records attached. The creditor was an assignee of the original creditors and simply generated proofs of claim forms from electronic data stating the dollar amount of the debt, with no back up. They did this routinely, and only filed amended proofs of claim to attach any documents or records to support the claim after an objection was filed to the proof of claim. The Court had previously admonished the attorney for the creditor and had issued an Order requiring leave of the court to file an amended proof of claim after an objection had been filed. The law firm continued to file claims for the creditor without any documentation attached, in violation of this order, and continued the practice of filing amended proofs of claim with supporting documentation attached only after an objection was filed, and did not comply with the court’s order requiring them to obtain leave of court to amend The law firm was sanctioned for this practice. In its order the court cited the requirements set out in Bankruptcy Rule 3001 for the documentation needed for a proper proof of claim and the Court’s Order for requiring leave of the Court to file an amended claim after an objection was filed. The following quotes from the Court’s opinion are instructive. “A more apt description of Stromberg and LVNV’s actions in this case is ‘deliberate malfeasance’.” “Thus it appears that Stromberg and his client have a standing policy which involves willfully violating Bankruptcy Rule 3001 because it is cost effective to do so.” “However, because the Debtor in this case caught on to LVNV’s ruse and because this Court has already taken LVNV to task for a substantially similar failure in a prior case, LVNV will not only suffer disallowance of its claims, but Stromberg, as an officer of this Court, will be made to answer for his flagrant disregard for Bankruptcy Rule 3001, this Court’s Notice and Order and applicable law.” In re Depugh, 409 B.R. 84 (Bkrtcy S.D.Tex. 2009). See also In re Gilbreath, 395 B.R. 361, In re Depugh 409 B.R 125, (Bkrtcy S.D. Tex. 2009).

Mass Produced Forms That Don’t Fit the Facts Two reported opinions concern sanctions imposed upon a law firm that mass produced proofs of claims and objections to Chapter 13 plans with respect to mortgage loans in consumer bankruptcy cases. The work was done by non-lawyers who simply plugged the forms, with little or no supervision by an attorney. The law firm was sanctioned for repeated instances where the forms did not fit the facts. James Allen signed a Note and Deed of Trust for about $115,000 to buy a house. The note was eventually assigned to Countrywide Home Loans and he also gave Countrywide a Deed of Trust on another piece of property. Mr. Allen filed a Chapter 13 proceeding. Countrywide hired Barrett Burke, et al to file a Proof of Claim and object to the Debtor’s Chapter 13 plan. (In re Allen, 2007 WL 115182 (Bkrtcy. S.D.Tex.) (See companion case and cite below). Judge Wesley Steen determined that “the objection was grossly erroneous and to anyone familiar with bankruptcy law, the objection is clearly legal nonsense.” He went on to state that “ The objection then makes allegations which on the face of the document are at best boilerplate and at worst are simply incomprehensible or baseless in the context of this case.” The Debtor’s counsel stated he had previously notified Countrywide that the property in question was not the residence of the Debtor. A hearing on confirmation was held and local counsel was not prepared to prosecute Countrywide’s objection to the plan. He did argue that the Plan was not confirmable because it involved the Debtor’s principal place of residence in spite of the fact that Countrywide had been advised otherwise and was instructed by Barrett Burke that if this argument was made he should request a continuance “ to implement “Plan B” which apparently had not yet been devised.”. The Court found that it had given “Countrywide and Barrett Burke clear warning and opportunity to fix what was apparently broken.” The case goes onto describe in detail numerous other deficiencies in the position of Countrywide and Barrett Burke. A Show Cause Order was issued as to why sanctions should not be imposed. At the sanctions hearing Barrett Burke offered testimony as to why sanctions should not be issued.


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The reasons ranged from computer generated pleadings which were erroneous because of input errors to misunderstandings regarding failure to appear. In considering sanction under Rule 9011, the court cited numerous other cases in which Barrett Burke had been warned or sanctioned for its conduct. In the case of In re James Patrick Allen case, 2007 WL 1747018 (Bkrtcy. S.D.Tex.). The Court issued its Memorandum Opinion Concerning Nature and Amount of Sanctions. In a lengthy opinion, the Court reviewed the issues regarding sanctions and the reasonability thereof. Barrett Burke presented evidence of the steps they had tried to take to remedy the problems found by the Court. These included funds spent to improve its computer system; attorney review systems, hiring an independent auditor (former Bankruptcy Judge Bill Brister) to examine its procedures and processing; hiring attorney Marilee Madan at $500,000 per year in a supervisory position; instituting training and CLE in addition to Bar required CLE; and other additional measures. The opinion then discussed the amount of sanctions the court believed were appropriate and conducted an analysis of the calculations involved. It concluded that $150,000 in sanctions was appropriate, but reduced the amount by $75,000 in recognition of Barrett Burke’s efforts to correct the deficiencies. The final paragraph of the opinion is perhaps the most telling because it sets a standard for all attorneys. It is quoted in full here. “What is required, first, is that a careful, thoughtful attorney must review a document before it is filed and assure not only that the numbers are accurate, but also that the document makes sense, on its face, and communicates clearly and accurately the client’s position. Second, if a mistake is made, a thoughtful clearly articulated correction must be filed into the record, not a meaningless form. The correction must be timely and must be filed without the need for a party to seek coercion. Third Barrett Burke must send to the hearings on its motions an attorney who is fully informed and authorized to resolve the matter at the hearing, or if resolution of the matter at the hearings is not possible, the attorney must at least inform the court clearly and correctly what the problem is.”

The lesson is, you can’t just let the machine run and deal with problems when they arise. You have to put procedures in place for non-lawyer staff to recognize when the forms don’t fit and bring the matter to the attention of a lawyer. Banks Pass the Buck to Outside Counsel The response of big banks to challenges brought to mass processing of such claims on account of failure to exercise supervision which led to ”robo signing” of affidavits and instruments, and gross mishandling when the facts did not fit the forms, and sanctions such as were imposed in the Barret Burke cases, was to pass the buck to their outside counsel. The banks made deals with government lawyers to stop these practices, and as a consequence the banks put the burden of compliance back onto the law firms who handle their mass produced collection and foreclosure business. Recent outside counsel manuals contain provisions which put the risks and burdens of supervision and identifying problems and the duty to bring problems to the attention of the bank’s management upon outside counsel. The days when you could mass produce legal documents and let non lawyer staff run the machine without hands on supervision are over. 9. DON’T LET ANYONE CHILL THE

BIDDING. If you attend a foreclosure sale or judgment sale to observe or bid, don’t make or accept any offers from another potential bidder to either bid or not to bid. If you are conducting a foreclosure sale or a judgment sale, don’t permit an interruption of the bidding. If two people bid against each other, and at some point in the bidding, one of them asks you to temporarily suspend the bidding for some reason, don’t do it. He may confer privately with the other bidder and make a deal, such as offer to pay him some money not to make another bid. Any such deal amounts to chilling the bidding, and is unethical. By way of illustration, Jules Bagdan was a Chapter 7 Trustee in Florida. He auctioned off a


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corporate jet belonging to a debtor. At the auction, one bidder requested a short recess, during which it paid $20,000 to the other bidder to stop bidding. The trustee was not aware of this when he sold the jet, but he subsequently learned of the bribe and did not report it to the court. The two bidders were charged with bribery under 18 U.S.C. § 152(6). Mr. Badgan was not charged with a crime, but his accounting firm fired him and he was forced to resign from the panel of trustees. 10. DON’T BUY CLAIMS Can an attorney purchase a collection claim outright, either for himself or for a company which the lawyer or law firm owns and controls? Sometimes creditors have meritorious debt collection claims which the creditor is not willing to pursue by suit, either because of the costs, or the time and effort involved in litigation. If the creditor does not want to sue, can the lawyer or law firm buy the claim outright from the creditor? Can the lawyer or law firm sue in the name of the Creditor? There are some collection lawyers who do this. I don’t think so. Texas Rules of Professional Conduct 1.08(h) provides: (h) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client except that the lawyer may: (1) acquire a lien granted by law to secure the lawyer’s fee or expenses; and (2) contract in a civil case with a client for a contingent fee that is permissible under Rule 1.04. There are companies that buy charged off credit card accounts and consumer loan deficiencies from banks in bulk for pennies on the dollar and then file mass lawsuits on the accounts. Can a lawyer or law firm own a company that acts as a debt buyer and represent the company in legal proceedings? This practice appears to be acceptable. The fact that the lawyer or law firm has an ownership interest in the company is different from having an ownership interest in the cause of action. In house counsel who work for a company on a salary basis are

not disqualified from representing the company in legal proceedings, and the same should apply to counsel who own an interest in the company as members or shareholders. But, remember that a lawyer who represents himself has a fool for a client.
