Page 9 - John Hundley 2015

Bankruptcy Law Roundup

Sharp Thinking

No. 129 Perspectives on Developments in the Law from Sharp-Hundley, P.C. May 2015

Intent To Benefit Certain Creditors Sufficient For Fraud

The common intent to benefit friendly creditors by not listing them in one’s bankruptcy papers is
sufficient intent to support denial of a bankruptcy discharge, the Seventh Circuit U.S. Court of Appeals has
ruled.

Moreover, dealing with an allegedly uneducated debtor, the court said that her “failing to seek advice
of counsel, while knowing that she lacked legal training or knowledge, bespoke a reckless indifference to
the truth, and no more is required for fraudulent intent in bankruptcy.” In re Katsman, 771 F.3d 1048 (7th
Cir. 2014).
Although the Katsman debtor also had failed to disclose certain assets, it was the omission of
creditors – often thought to be an immaterial matter – that drew most of the court’s ire. It suggested
omission of creditors was proper “only if the amount owed them was utterly trivial.”
The court rejected the debtor’s explanation that she hoped to pay the omitted creditors and thought
that including them would prevent that. “After she was discharged, she could pay anyone anything,” the
court said, rejecting her premise. Moreover, the intent to benefit one group of creditors is sufficient
fraudulent intent, it said, rejecting an argument that the debtor must have intended to receive a pecuniary
benefit for herself.

Panel Affirms Sanctions For Inappropriate “Unbundling”

The Ninth Circuit Bankruptcy Appellate Panel (BAP) has affirmed a bankruptcy judge’s use of
sanctions in an attempt to “promote a systemic change” in the practice of “mill” attorneys rotely excluding
adversary actions from the scope of their retainer agreements.

Recognizing that consumer bankruptcy attorneys can “unbundle” adversary proceedings from their
agreed representation in some circumstances, the panel said that such “limited scope representation”
must “comply with the rules of ethics and the Bankruptcy Code. A qualitative analysis of each individual
debtor’s case must be done at intake to ensure that his or her reasonable goals and needs are being
met.” In re Seare, 515 B.R. 599 (9th Cir. BAP 2014).

In Seare the bankruptcy lawyer relied on an adversary-action exclusion provision in a form retainer
contract to avoid making a defense to an adversary action seeking to except a debt from discharge on
grounds of fraud. The debt was already to the judgment garnishment stage when the attorney was
consulted, and its fraud basis would have been revealed by a reasonable investigation, the bankruptcy
court had found. The BAP agreed with the bankruptcy judge that permanently stopping that garnishment
was a principal motivation of the debtor in seeking bankruptcy relief and hence “unbundling” of the
defense of the adversary was an inappropriate action under ethical rules applicable to “unbundling”
issues. In the view of both courts, the “unbundling” decision must be driven by the client’s interests, not
the lawyer’s.

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Sharp Thinking is an occasional newsletter of Sharp-Hundley, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp Thinking
shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein constitute
educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal advice on
your particular situation, contact a Sharp-Hundley lawyer at 618-242-0200 or one of the addresses provided on page 2 of this newsletter.