The New Jersey Supreme Court is considering whether ethics strictures should be relaxed to facilitate appearances of volunteer lawyers for debtors in bankruptcy cases.

A case argued Tuesday tests whether an attorney can ethically provide pro bono legal services to a debtor in a no-asset Chapter 7 bankruptcy even though the lawyer’s firm represents a creditor of the debtor in an unrelated matter.

Last year, the Advisory Committee on Professional Ethics said in a formal opinion, No. 17-2012, that while there was no direct conflict of interest, the lawyer must get consent from both sides.

Now groups promoting legal services—Volunteer Lawyers for Justice, the New Jersey State Bar Association and the Pro Bono Institute—want that opinion abrogated, saying that requiring waivers will chill volunteer efforts.

VLJ’s lawyer, Catherine Weiss, the director of the Lowenstein Center for the Public Interest at Roseland’s Lowenstein Sandler, said that in most cases there are no conflicts because the debtors have no assets that any creditor could go after. “There is no direct adversity,” she said.

Justice Anne Patterson posited a hypothetical about a small-town solo who has done work for the local bank and then signs up to represent a debtor in a no-asset bankruptcy. If one of the creditors happened to be that bank, would there be a conflict of interest?

No assets, no conflict, Weiss said.

Justice Jaynee LaVecchia asked whether creditors get notice of the firms that represent the debtors.

Weiss said the lawyer and the lawyer’s firm are listed on the notice that the bankruptcy trustee in a particular case sends to each creditor.

Justice Barry Albin asked what would happen if a creditor, represented by the volunteer lawyer’s firm, appears at the bankruptcy hearing and objects to the application. Weiss said that has never happened but if it did, the lawyer would likely ask for an adjournment so he or she could move to withdraw from the case and have another volunteer attorney assigned to represent the debtor.

“Does the debtor know who you represent?” Patterson asked.

“Not every client,” Weiss said.

“Why not?” asked Patterson.

“It might be possible…but it’s not required” under the Rules of Professional Conduct, Weiss said.

Albin asked what a firm would do if a creditor represented by the firm called the lawyer and objected to the lawyer’s representation of the debtor.

“That would not be an ethics issue,” Weiss said. “It would be a business issue.”

Patterson suggested the option of having participating firms send form letters to each client who is a potential creditor, explaining the firm’s participation in the program.

“That process would very likely discourage and depress participation in the program,” Weiss said.

Susan Feeney of Newark’s McCarter & English, representing the State Bar, said the VLJ program is vital to the goal of increasing pro bono work statewide.

Chief Justice Stuart Rabner asked what would be wrong with getting written waivers from both sides.

Feeney said requiring waivers could lead lawyers to become more concerned about their relationships with paying clients and “give everyone an excuse” to not participate. “You’ll have partners who don’t like pro bono and businesses who just want to say no,” she said.

Steven Marino, representing the Pro Bono Institute, also urged the court to allow the program to continue because of the need for lawyers to help no-asset debtors who otherwise would go into a bankruptcy pro se.

Marino, of DLA Piper in Short Hills, said there were about 30,000 bankruptcy filings in New Jersey last year, about 75 percent of them Chapter 7s. An unrepresented debtor, he said, has a much greater chance of rejection.

Deputy Attorney General Michael Walters, representing the ACPE, said that while the VLJ’s goals are laudable, the lack of notification creates an ethical problem for the participating lawyer.

“There is a responsibility to the existing client and the client has an expectation of loyalty,” Walters said. “The firm is put into the position of having divided loyalties.”

Walters said that even with the VLJ’s screening process, clients are not being informed about the potential conflicts. That, he said, is a violation of the RPCs.

Rabner asked why that is a problem in no-asset bankruptcies.

“There is a significant risk of material limitation” on the lawyer’s abilities, Walters replied.

After a number of firms hesitated to participate in the VLJ program because of the questions posed by representing both creditors and debtors, the VLJ asked the ACPE for its opinion.

“A creditor client may have reason to object to its lawyer’s representation of the debtor due to loyalty concerns or other non-monetary interests. In such cases, the lawyer could be materially limited by obligations to the creditor client and a conflict would arise,” the ACPE said. “A lawyer must consider each unique client, the obligations the lawyer has to that client, and whether the client could question the lawyer’s loyalty and independence of judgment. If loyalty and independence of judgment can be questioned, if two clients have adverse interest, whether direct or indirect, then there is a risk that the representation will be materially limited.”

Contact the reporter at mbooth@alm.com.