Pre-Bankruptcy Planning Gets Attorney In Trouble When Legal Help Crosses The Line
All bankruptcy attorneys at one time or another meet clients who suggest transfers of assets to their family or friends in order to hide the assets from a future bankruptcy. These conversations put the attorney in a delicate position. Certainly, the attorney cannot file the debtor’s bankruptcy after discussions about possible bankruptcy fraud. Sometimes the attorney can get in trouble assisting pre-bankruptcy transfers even when the client files bankruptcy later with a different attorney in a different jurisdiction. A recent court case dealt with an attorney who may have crossed the line and got himself in trouble with the bankruptcy court.
In this case, a client met with the attorney to discuss pre-bankruptcy planning. The clients revealed a plan to sell or encumber non-exempt assets to family members, then move to Florida and file bankruptcy, and after the bankruptcy move back to their home state and get the assets back from their parents. For example, one part of the scheme was for the debtor to give his father cash, have the father give the cash to a family friend, have the friend “loan” the cash back to the debtor, and have the debtor pledge non-exempt stock to repay the loan. A total sham. The attorney wrote letters and notes describing the proposed fraudulent transactions and clearly warning the clients not to implement their plan. The attorney stated that although the transactions are legal in their own right, filing bankruptcy without disclosing accurately the transfers would be bankruptcy fraud. His letter to the clients warned the clients not to engage in the bankruptcy plan.
The same attorney, however, assisted the client by drafting the documents for the same above-described loan and stock pledge. The clients moved to Florida and filed bankruptcy with a different attorney. The case reached the courts on a bankruptcy fraud case involving, among other things, issues of attorney-client privilege. The court admonished the planning attorney by helping his clients in “parking assets with close family.” The court stated that there, “is also a reasonable likelihood that (the attorney) either knew or was willfully blind to the fact that his clients were entering sham transactions….”
Perhaps, the attorney thought he was covering his liability by writing letters describing in detail the clients planning fraud and then advising the clients not to implement the plan. To me, and I think to the court as well, the attorney’s memo looked like a roadmap for the client’s bankruptcy fraud with a “don’t do it” attached in the conclusion. When the attorney actually assisted with the documents and transactions he advised against in his own memo he really crossed the line.
Attorneys love to write, and attorneys think they are protecting themselves when they document what bad things they told clients to avoid doing. In this case, I think this attorney would have been better off writing nothing to his clients. The attorney’s detailed letters documented that the attorney knew what his clients were planning and made it look like the attorney was the architect of the plan. Then, after describing the bankruptcy fraud in his letter the attorney helped, even if in a minor way, to implement the plan. I’m not suggesting the attorney should have kicked these guys out of his office; explaining the law and the legal problems with clients’ pre-bankruptcy schemes usually stops the plan and helps the client. But, when the clients seem intent on pursuing games with the bankruptcy court the attorney cannot play on the clients’ team. It’s common sense. See 609 F. 3d 9009
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