Catherine Weiss of Lowenstein Sandler
Catherine Weiss of Lowenstein Sandler ()

The Supreme Court on July 2 cleared the way for more lawyers to take on pro bono bankruptcy work, especially those from larger firms.

The court overturned an ethics opinion which found that lawyers who do pro bono work for Chapter 7 debtors without any assets have a conflict of interest if their firms happen to represent any of the debtor’s creditors, even in an entirely unrelated matter.

Thus, they can only represent the debtor if they obtain an informed waiver of the conflict from both sides, stated the Advisory Committee on Judicial Ethics (ACPE) in written opinion no. 17-2012, on May 10, 2013.

The Volunteer Lawyers for Justice (VLJ), a Newark-based pro bono organization, challenged the opinion because the requirement for a conflict waiver was deterring lawyers who wanted to participate, especially those from large law firms that represent large institutional creditors such as banks, phone companies and utilities, to whom the low-income debtors it served often owe money.

The New Jersey state bar association also argued as an amicus for reversal, along with the Pro Bono Institute and clinics at Rutgers-Newark and Rutgers-Camden law schools.

The court has now concluded that there is no conflict and that “this valuable pro bono effort can continue to operate with appropriate safeguards.”

VLJ’s lawyer, Catherine Weiss of Lowenstein Sandler in Roseland, said the ruling is the first by any state’s top court to rule on the question and “will help pave the way for pro bono bankruptcy programs around the country.

The ACPE had found the type of concurrent conflict prohibited by Rule of Professional Conduct 1.7(a)(2), where there is a “significant risk” that a representation “will be materially limited by the lawyer’s responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.”

In finding no conflict, the court looked to the nature of a Chapter 7 proceeding – a framework for clearing debts rather than a lawsuit— makes it less likely for a clash of interests to develop because it only becomes adversarial if someone objects and when that occurs, VLJ volunteer lawyers who firms represent a creditor will withdraw.

The VLJ procedures to minimize the conflict risk were another factor.

The program screens out directly adverse interests at the outset, such as those that arise when a firm represents a creditor in a matter related to the bankruptcy, or the creditor has sued the debtor in an unrelated case.

The volunteer attorneys “pose questions designed to root out cases that may be of particular importance to a creditor” and “screen for cases that involve only one creditor or debts that are sufficiently large that they would likely have a material impact on a creditor’s bottom line,” observed Chief Justice Stuart Rabner for a unanimous court.

Those sorts of concerns rarely surface because for large institutional creditors, like cell phone service providers, the amount of debt in a typical Chapter 7 case is not significant to the company as a whole and for smaller creditors, the size of the debt would not justify sending a representative to a section 341 meeting or challenge the discharge, Rabner explained.

The screening also involves a double effort to ensure the client is truly indigent.

VLJ, which only represents people with an income up to 175% of the federal poverty level, about $27,500 for a family of two, does the initial screening and turns away anyone with assets available for distribution to creditors. The volunteer lawyers’ firms repeat the process.

The debtors are told at the outset that if a conflict pops up, the lawyer is out and the law firm lets creditors know of the representation. The creditors listed in the Chapter 7 petition also receive notice from the Bankruptcy Court because the notice of the case identifies the debtor’s lawyer.

The court found further support in a Bankruptcy Code provision that allows court-appointed trustees to hire “disinterested” attorneys to assist them and expressly states that attorneys are not disqualified solely because of work done for a creditor, absent objection by another creditor and an actual conflict of interest.

Rabner acknowledged that “some creditors who are clients of the firm may be less than pleased by a lawyer’s volunteer activities on behalf of a debtor” but said “that is not the standard to determine whether a conflict of interest exists.”

In any event, VLJ told the court that in 100 cases it has handled over the four-year history of its bankruptcy clinic, no creditor had objected to the discharge of a client’s debt or appeared at a section 341 meeting to question the debtor.

If that did happen, another attorney from outside the firm should take over the debtor’s case, Rabner said.

His opinion took note of the recent downturn in the economy which left many people needing to clear their debts but unable to pay for a bankruptcy attorney.

Rabner cited statistics that more than 1.3 million bankruptcies were filed nationwide in the year ending on March 31, 2012, 400,000 more than during the same period in 2008, and that pro se filings had grown even more, by over 200 percent.

He mentioned a 2007 survey which revealed that “17.6 percent of unrepresented debtors had their cases dismissed or converted as compared with 1.9 percent of those with lawyers.

“Programs like VLJ’s clinic help address this crisis, as volunteer lawyers try to pave the way for debtors to recover financially,” he wrote. Rabner commended the volunteer lawyers for helping to “bridge the justice gap” and extolled their efforts as “in keeping with the finest traditions of the practice of law.”

The case came about because of a VLJ clinic in which lawyers from Lowenstein Sandler team up with in-house counsel from Merck to assist indigent Chapter 7 debtors.

Despite following conflict protocols used in similar New York and Boston programs that had been approved by local ethics authorities they still had some difficulty in recruiting because would-be volunteers remained wary of conflicts so VLJ asked the ACPE for an opinion, expecting it to put those worries to rest.

Instead, Lowenstein stopped taking new cases as a result.

On top of the “administrative hurdle” of securing the waiver was the reluctance to annoy clients by repeated phone calls to the office of general counsel, said Weiss.

The state bar’s lawyer, Susan Feeney of McCarter & English in Newark, called the court’s decision “critical in helping us mobilize the private bar to take on more work.” If the ACPE opinion stood, “many lawyers would not do the work and others who tried to get the waiver might run into roadblocks.”

Steven Marino of DLA Piper in Short Hills, who represents the Pro Bono Institute and the Rutgers clinics, said the court’s ruling “means access to pro bono counsel will be greatly expanded because larger law firms will be able to take on representation of these clients without having to be concerned that there’s a conflict with other firm clients in unrelated matters.”

ACPE chairman Richard Badolato, of Connell Foley in Roseland, declined comment.

Contact the reporter at mgallagher@alm.com