More Lawyer Problems in Houston

Judge Letitia Clark has added an entry to the growing list of opinions dealing with attorney problems in the Southern District of Texas. In In re John M. Diaz, No. 05-95123, 2006 Bankr. LEXIS 2008 (Bankr. S.D. Tex. 8/28/06), the Debtors' attorney in a chapter 13 case filed a fee application requesting $4,132.00 in fees and $301.50 in expenses. Apparently the Court had been tipped off as to problems with the case because both Debtors and several employees from the attorney's law firm testified at the fee application hearing. The picture painted by that testimony was not pretty.

According to the Debtors, they met with their attorney once for 30-40 minutes before filing the initial schedules and plan. They were not asked any questions about their budget. However, the documents filed under penalty of perjury included a detailed budget which contained just enough disposable income to pay secured claims and 7% to unsecured creditors. The Debtors then amended their plan and schedules five times with the result that under the final confirmed plan unsecured creditors were to receive a dividend of 100%. One of the amended schedules included an expense item of $800 per month despite the fact that the debtors had not made charitable contributions in several years. The Debtors testified that they did not understand the various changes to their schedules and plans and that all of their communications with the law firm were through secretaries and paralegals.

When Debtors' counsel realized that he was in trouble, he offered to reduce his fee to $500. However, the Court did not accept this offer. Instead, the court denied all fees. The court stated:

"In the instant case, (attorney) presented false schedules to the court, without adequately counseling his clients as to what the schedules represented, and without conducting any investigation into their veracity. It appears that the schedules contained figures invented by (attorney) or his subordinates, and filed for the improper purpose of evasion of Debtor's obligations to pay creditors. These services violated counsel's duty to instruct and supervise the Debtors, and violated (attorney's) ethical duty of candor to the tribunal. The services rendered by (attorney) and his subordinates were of zero value, no matter how much time was spent on such services, and irrespective of the ultimate confirmation of the plan in the instant case. In addition, (attorney) has imposed considerable burdens of time and detailed attention on his clients, the Trustee, and the court system, through his inadequate client counseling, filing of false documents, and lax supervision of staff."

Slip Op. at 13-14.

The facts of this case, if accurately found by the Court, are shocking. The Court found that the law firm made up numbers to minimize the Debtors' disposable income, did not bother to obtain actual expense figures and did not tell the Debtors what they were signing. It strains credibility a little bit to assume that Debtors making $11,000 a month were not sophisticated enough to know that something was not right with their filings, especially after the trustee requested amendments at the creditors meeting and filed several motions to dismiss based upon the inaccurate schedules. It also seems foolish at best that the attorney would risk being caught and exposed (as he ultimately was) just to earn a fee in a chapter 13 case.

On a certain level, this opinion is good because it points out that there are consequences for bad behavior. However, in a world of trial by anecdote, it gives fuel to the bankruptcy reformers who believe that all debtor's lawyers are unethical and out of control. This case is noteworthy precisely because it is an aberration. This was a case where the system worked. Therefore, it should not be viewed an an indictment of the system or the vast majority of the participants within that system.