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DeLuca v. Seare (In re Seare)

In re Seare, No. NV-13-1196-KiTaJu (9th Cir. B.A.P. Aug. 25, 2014).
The lawyer for a chapter 7 debtor was properly sanctioned for entering into a retainer agreement excluding dischargeability litigation without obtaining the debtor's informed consent to the exclusion.
Procedural context:
In this joint chapter 7 case, the bankruptcy court sanctioned the debtors’ lawyer for entering into an “unbundled” retainer agreement excluding dischargeability litigation without obtaining the debtors' informed consent to the exclusion. The lawyer appealed to the bankruptcy appellate panel, which affirmed.
Before the bankruptcy, the debtor-husband sued his former employer in federal district court for employment discrimination. While the discrimination action was pending, the husband admitted to his lawyer (who was not the bankruptcy lawyer) that the husband had “embellished” explicit e-mails to bolster his discrimination claim. The district court found that the husband had committed “fraud upon the court” and entered a judgment against the husband and in favor of the former employer for $67,430.58. The debtors hired DeLuca as their bankruptcy lawyer and filed a chapter 7 petition in Nevada. The former employer brought a nondischargeability action under 11 U.S.C. § 523(a)(4) and (6) based on the district court’s judgment. The bankruptcy court sanctioned DeLuca for violating provisions of the Nevada Rules of Professional Conduct and the Bankruptcy Code. The Rules that DeLuca violated were 1.1, 1.2(c), 1.4(a)(2)-(4), and 1.5(b), and the Code sections that he violated were 526(a), 528(a), and 707(b)(4)(C). Rule 1.1 requires that a lawyer provide competent representation to a client, and Rule 1.2(c) permits a lawyer to limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent. The debtors could have reasonably anticipated that the judgment debt would be discharged based on DeLuca’s failure to investigate the judgment and inform the debtors of the inevitable adversary proceeding. As a result of his erroneous assumption that the judgment arose from unpaid medical bills, DeLuca could not provide adequate counsel. Rule 1.4(a)(2) requires that a lawyer reasonably consult with the client about the means by which the client’s objectives are to be accomplished, and Rule 1.5 requires that the scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible must be communicated to the client, preferably in writing. The husband may have understood that defending fraud allegations would require an additional fee or that adversary proceedings or nondischargeability allegations were excluded from the flat fee, but the retainer agreement failed to make the connection between these issues. Section 526(a)(1) requires that a debt-relief agency perform any service that the agency informed an assisted person that it would provide in connection with a bankruptcy case. The retainer agreement stated that representation for nondischargeability allegations and adversary proceedings was available for an additional fee, but DeLuca flatly refused to provide these services once the complaint was filed. Section 526(a)(3) bars a debt-relief agency from misrepresenting to any assisted person the services that the agency will provide to the person or the benefits and risks that may result if the person becomes a debtor in bankruptcy. DeLuca failed to inform the debtors about the risks associated with an adversary proceeding that they were nearly certain to face once they filed for bankruptcy. Section 528(a) requires that a debt-relief agency execute a written contract with the assisted person that explains the services that the agency will provide to the assisted person and the fees or charges for the services. DeLuca failed to sign the retainer agreement. Section 707(b)(4)(C)(i) provides that the signature of a lawyer on a petition certifies that the lawyer has performed a reasonable investigation into the circumstances that gave rise to the petition. DeLuca failed to perform a reasonable investigation into the judgment in favor of the former employer; had he done so, he would have determined that a fraud nondischargeability action was likely. The concurring B.A.P. judge summarized her suggestions for debtors’ attorneys as follows: (1) At the intake interview with the debtor, identify fully and completely the debtor’s goals; (2) Do not rely solely on the debtor’s input to help the debtor ascertain the debtor’s goals; (3) If, after ascertaining the debtor’s goals, the lawyer believes that limited-scope representation is consistent with those goals, fully explain to the debtor the consequences and inherent risks that might arise if an adversary is filed against the debtor and the lawyer has not included representation in that proceeding in the unbundled services; (4) Customize the retainer agreement to the goals of the debtor; (5) After describing to the debtor the risk of limited-scope representation, give the debtor the opportunity to “shop elsewhere” for a lawyer who will provide full representation before entering into the contractual relationship with the debtor for the limited scope; and (6) Document as fully as possible all the steps taken to comply with these requirements.
Ralph B. Kirscher, Laura S. Taylor, and Meredith A. Jury, Bankruptcy Judges.

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