Sunday, October 12, 2014

NCBJ 2014: Ethics and Supreme Debate

Saturday concluded NCBJ with ethics and the Supreme Court review.   (There was also a program on scientific studies of mindfulness which I missed).

Wait, Wait, Don’t Tell Me! An Ethics Game Show:  Retired Judge James H. Haines as Peter Segal, Christine Devine (DeMaillie & Lougee), Judge Benjamin Goldgar, Timothy Nixon (Godfrey & Kahn), Judge Neil Olack, Prof. Nancy Rapoport and Judge Erithe Smith.  

This was an entertaining quiz show style ethics panel.    For each ethical scenario, there were three answers only one of which was correct.   Here are the questions and correct answers.  
1.  Can law firm be sanctioned for failure to amend obvious errors in schedules?   Yes.    Section 707(b)(4)(C) and (D) and Rule 9011 require an attorney to certify that after making a reasonable inquiry, the petition, schedules and SOFA are correct and that he does not know of any information that would make them incorrect.   The specific hypothetical involved an international law firm which filed bankruptcy but failed to mention any of its international offices.

2.  Can an attorney ethically limit its representation of a chapter 7 debtor to exclude adversary proceedings when necessary to achieve the client’s goals?  No.   While unbundling can be done with full disclosure, an attorney cannot disclaim defending adversary proceedings if it is known in advance that this will be necessary to meet the client’s objectives.   In re Seare, 2014 Bankr.LEXIS 3584 (9th Cir. BAP 2014).

3.  May CROs be employed under sections 105(a) and 363(b)(1)?  Yes.    Under what is known as the “Jay Alix Protocol,” a chief restructuring officer may be employed in the ordinary course subject to review of his fees for reasonableness.    Additionally, the CRO may only serve in one capacity.

4.  Can a Chinese Wall be used to prevent firm from being disqualified based on one attorney who is not disinterested?   The answer given was no, but that Texas follows minority rule.    An example of the majority rule is In re Essential Therapeutics, Inc., 295 B.R. 203, 211 (Bankr. D. Del. 2003), while the minority rule is illustrated by In re Cygnus Oil & Gas Corp., 2007 Bankr. LEXIS 1913 (Bankr. S.D. Tex. 2007).   I am not completely satisfied by the panel’s designation of these as majority and minority rules.  They might be worth more scrutiny.

5.  Can the same attorney be retained to represent multiple debtors with inter-company claims?    There is no per se disqualification rule.   Must decide on a case by case basis.

6.  What is appropriate sanction for undisclosed fee sharing?   Court may disqualify firm and order disgorgement of fees.   However, court should use least restrictive sanction to deter bad conduct.

7.  May an attorney withdraw when the client insists on taking a course of action that the attorney disagrees with?    Yes, but only with court permission.

8.  Can an attorney be sanctioned for “ghostwriting” a pleading for an acquaintance?  Maybe.   I think this one is too fact specific to give a definitive answer.   In the hypothetical, the attorney was asked to provide a law school acquaintance with a form claims objection which the debtor then used without modification.    In my mind, providing a form to another attorney is never “ghostwriting.”   There was some discussion that an attorney who prepares a pleading for a pro se party is required to sign it.  I am not convinced by this argument.

9.  Can a plan provide that Committee members will be able to recover their attorney’s fees?  No.  They have to justify that they made a substantial contribution.

10.  Can a firm get paid all of its fees when it obviously overstaffed the case?   No.

May You Live in Interesting Times:   The Supreme Court’s Year in Bankruptcy:   Eric Brunstad (Dechert, LLP) and Dean Erwin Chemerinsky

This panel took the form of a debate between Eric Brunstad and Erwin Chemerinsky on the subject of consent under Stern v. Marshall.   Brunstad took the position that Stern v. Marshall was correctly decided but that consent was permissible.    Chemerinsky took the position that Stern v. Marshall was wrongly decided and that if followed to its logical conclusion, consent would not be allowed.   In this section, I am referring to major Supreme Court cases by name rather than by citation.    However, they can be easily looked up on any number of free legal research sites.


Brunstad argued that Article III originated from the experience in England where it was necessary to separate the judiciary from the crown.   On the other hand, the issue of who decides your case does not implicate the independence of the judiciary and can be waived.   According to Brunstad, Marathon stands for the proposition that you cannot assign a purely private dispute to an Article I tribunal.   However, in Schor, the Supreme Court indicated that the right to an Article III tribunal was a personal right which could be waived.   Granfinanciera equated the right to a jury trial and the right to an Article III tribunal.   Because a jury trial can be waived, an Article III tribunal could be as well.  

He then made the following points (which he numbered making it much easier for me to report):

1.  Schor designated the right to an Article III tribunal as a purely personal right.  Having a case decided by an Article I or an Article III judge does not implicate separate of powers concerns because separation of powers is concerned with conflicts between the judicial branch and the legislative or executive.

2.  By analogy, if you can waive your right to a jury trial, you can waive your right to an Article III judge.

3.  For hundreds of years, District Courts have relied on special masters.   With consent, a special master could make findings upon which the District Court would enter judgment.

4.  Arbitration allows decision by a non-Article III tribunal, although the arbitrator cannot enter a judgment.

5.  Bankruptcy judges are like magistrates who enjoy broad authority with consent.

6.  The consequences of not allowing consent would be detrimental to the modern administrative state.  


According to Dean Chemerinsky, Stern v. Marshall was wrong because it misunderstood separation of powers.    He said that separation of powers is a means to an end rather than an end itself.   Separation of powers is invoked when one branch usurps or interferes in the operations of another branch.   Allowing bankruptcy courts to decide state law issues does not implicate either concern.   Therefore Stern was wrongly decided.

However, he said that once you accept that Stern adopted a formalistic approach to separation of powers rather than a functional one (which is what Dean Chemerinsky advocates), you must follow that logic to its end.   Mr. Brunstad’s arguments were functional rather than formalistic.   However, you cannot accept Stern and still take a functional approach.

Chemerinsky then argued that:

1.  Separation of powers violations cannot be overcome by consent.

2.  The authority of the federal courts cannot be changed by consent, a proposition which goes back to Marbury v. Madison.

Dean Chemerinsky went on to state that there is no good reason to distinguish between subject matter jurisdiction and authority to decide cases.    He said that under Mr. Brunstad’s logic, subject matter jurisdiction could be waived.  

While Mr. Brunstad relied on Schor, that case said that “essential attributes” are reserved to Article III courts.   

He also rejected the notion that there was a difference between personal and structural rights because all structural rights exist to protect personal liberties.   

The Dean also distinguished several of Mr. Brunstad’s analogies.   Neither a special master nor an arbitrator can issue a final judgment.   However, a bankruptcy judge can.   He said that federal magistrates are not a good comparison because their authority is still up in the air like that of bankruptcy courts.


In rebuttal, Mr. Brunstad challenged Dean Chemerinsky’s contention that jurisdiction and authority to decide were similar.   He said that only Congress can create jurisdiction, but Article III does not specify the form that inferior courts must take.   Further, all Article III requires from a structural viewpoint is independence from the Executive and the Legislative branches.   By placing Bankruptcy Courts within the judicial branch, Congress insulated them from pressure by other branches.   

There are some rights which cannot be waived, such as the right against involuntary servitude.  There are other rights such as the right to a jury trial which may be waived.   The right to decision by an Article III tribunal is a right which can be waived.  

He said that Stern was decided correctly (a position he had to take since the argued for the winning side) but that it did not involve impermissible delegation of judicial powers.   He said that most things that bankruptcy courts do, such as adjudicating claims, are public rights.   Stern, on the other hand, involved a tort claim which was a purely private right.   In Stern, it was clear that Pierce Marshall did not consent to adjudication of the tort claim in bankruptcy.      


Stern v. Marshall was decided wrongly because you should always take the functional approach to separation of powers.   Stern was wrong because there was no threat to separation of powers.  The central tension in Eric’s argument is that it takes a functional approach to a formalistic decision.   Separation of powers cannot be overcome by consent which resolves the consent issue.

Public rights are limited to suits by or against the government.   Because the government cannot be sued absent its consent due to sovereign immunity, it can allow actions to be resolved by or against it in a non-Article III tribunal.   However, most of the work of the Bankruptcy Court does not involve public rights.   Therefore, the public rights argument does not work.

Congress may create inferior courts, but it can’t give them authority beyond what Article III allows.    In Stern, Congress gave bankruptcy courts the power to decide counterclaims to proofs of claim and that authority was found to be unconstitutional.

The right to a jury trial was never structural.   Therefore it does not help on the separation of powers issue here.

Having listened to both arguments, I now have no idea how the consent issue in Wellness International will come out.  I thought that Dean Chemerinsky had the better argument in terms of consistency while Mr. Brunstad had the better argument in favor of making the system work.   Given that the Supreme Court vacillates between strict interpretation and practicalities, this one is very hard to handicap.   However, as a practitioner, the answer is easy:  bankruptcy courts need to be given as much authority as they need to do their jobs and the Constitution will still survive.


In the final minutes, they discussed the Court’s recent decisions.   They both observed that the court vacillates between strict statutory construction and policy concerns.   Law v. Siegel was an example of a strict statutory approach, while Clark v. Rameker (inherited IRAs are not exempt) was a practical approach.    This remains a constant tension with the court.

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