Can a lawyer in financial trouble file personal and professional-corporation bankruptcy and discharge clients' claims?

Plain-English summary

A lawyer practicing through a professional corporation could not meet his obligations and was considering Chapter 7 bankruptcy for both himself and the corporation. He faced a legal malpractice suit (insured except for a $50,000 deductible disputed with his former firm), and his corporation owed rent under a lease to a landlord who had since become his client. He asked whether filing, and seeking to discharge various claims, would violate the rules.

The committee concluded there is no ethical prohibition on a lawyer's seeking bankruptcy protection. It noted two limits. First, it would be unethical to file if the filing worked a fraud or deceit on any person or entity (ER 8.4(c)), citing ethics opinions and bar-admission cases on how nonpayment of debts bears on character. Second, it would be improper to keep representing a client where the filing created a conflict; if the lawyer concludes under ER 1.7(b) that the bankruptcy would "materially limit" his representation of a client, he must withdraw.

On the specific facts, the committee found nothing fraudulent or deceitful in a financially distressed lawyer seeking the full protection of the bankruptcy courts. Provided there was no fraud, deceit, or conflict of interest, it concluded the lawyer could (1) file Chapter 7 personally and for the corporation, (2) seek to extinguish dischargeable malpractice claims by clients, (3) seek to discharge the landlord-client's claim, and (4) seek to discharge contribution claims by his former partners or firm. A footnote observed that, under A.R.S. § 10-905, the corporation's bankruptcy would not shield the lawyer personally from the malpractice liability, though a personal filing potentially could discharge it.

Currency note

This opinion was issued in 1991, before Arizona's 2003 adoption of the Ethics 2000 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer file for personal bankruptcy without violating the ethics rules?

A: Yes. The opinion concluded there is no ethical prohibition on a lawyer's seeking bankruptcy protection, so long as the filing involves no fraud or deceit and no client conflict.

Q: Can the lawyer try to discharge clients' malpractice claims in the bankruptcy?

A: Under this opinion, yes, absent fraud, deceit, or a conflict. The committee concluded that seeking to extinguish dischargeable malpractice claims is not itself a rules violation.

Q: What if the creditor is also a current client, like a landlord?

A: The opinion concluded the lawyer could seek to discharge a landlord-client's claim, but cautioned that if the bankruptcy would materially limit his representation of that client under ER 1.7(b), he must withdraw from representing the client.

Q: When does the bankruptcy become an ethics problem?

A: When it works a fraud or deceit (ER 8.4(c)) or creates a conflict that materially limits a representation (ER 1.7(b)); the committee called these fact-intensive, case-by-case determinations.

Background and rules framework

The opinion applies ER 8.4 (Model Rule 8.4), which makes conduct involving dishonesty, fraud, deceit, or misrepresentation professional misconduct, and ER 1.7(b) (Model Rule 1.7), which bars representation that may be materially limited by the lawyer's own interests absent the conditions for client consent. It also notes A.R.S. § 10-905, under which shareholders of a professional corporation remain jointly and severally liable for professional liability.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / AZ ER 1.7(b) (conflict from the lawyer's own interests)
• MR 8.4 / AZ ER 8.4(c) (dishonesty, fraud, deceit, misrepresentation)

Statutes:

• A.R.S. § 10-905 (professional corporations; shareholder liability for professional services)

Cases:

• Florida Board of Bar Examiners re Groot, 365 So. 2d 164 (Fla. 1978); re G.W.L., 364 So. 2d 454 (Fla. 1978); Application of Gahan, 279 N.W.2d 826 (Minn. 1979): nonpayment of debts and moral character for bar admission

Other opinions cited:

• Michigan Informal Opinion CI-1037 (1984); Nassau County Opinion 88-47 (1988); New York State Bar Opinion 269 (1972); New York City Bar Opinions 194 and 279: a lawyer's bankruptcy is not itself unethical absent fraud

See also

• AZ Ethics Op. 90-15: Conflict of Interest
• AZ Ethics Op. 87-13: Professional Independence and Conflicts

Source

• Landing page: https://tools.dev.azbar.org/RulesofProfessionalConduct/ViewEthicsOpinion.aspx?id=630

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

5/1991

In the facts presented, not unethical for attorney suffering from financial hardships to seek and enjoy the full protection of the bankruptcy courts.

FACTS

The inquiring attorney practices law in the form of a professional corporation and is contemplating filing bankruptcy proceedings (for his professional corporation and for himself personally) because of his inability to meet current obligations. He is currently a defendant in a legal malpractice suit which is covered by insurance except for a $50,000 deductible. There is a dispute between the inquiring attorney and his former law firm (of which he was a shareholder, officer and a director) as to responsibility for the deductible. Additionally, the inquiring attorney’s professional corporation is obligated under a lease to a landlord. The lease is not personally guaranteed by the attorney. After the lease was entered into, the landlord became a client of the attorney.

QUESTIONS

1. Is it violative of the Rules of Professional Conduct for a member of the State Bar to file Chapter 7 liquidation proceedings under the federal bankruptcy laws for his professional corporation and for himself personally?

2. Is it violative of the Rules of Professional Conduct for a member of the State Bar, in filing Chapter 7 bankruptcy proceedings for his professional corporation and for himself personally, to seek to extinguish any dischargeable malpractice claims against the member by the member’s clients?

3. Is it violative of the Rules of Professional Conduct for a member of the State Bar, in his Chapter 7 bankruptcy proceeding on behalf of his professional corporation, to seek the discharge of a claim of a landlord who is also a client of the member?

4. Is it violative of the Rules of Professional Conduct for a member of the State Bar, in his Chapter 7 bankruptcy proceedings, to seek the discharge of any claims for contribution by the member’s former partners or law firm as a result of the pending legal malpractice case?

ETHICAL RULES INVOLVED

ER 1.7. Conflict of Interest: General Rule

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by... the lawyer’s own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after consultation. . .

ER 8.4. Misconduct

It is professional misconduct for a lawyer to:

(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation;

RELEVANT STATUTE

3 A.R.S. Annotated, Title 10, Chapter 3. "Professional Corporations":

§ 10-905. Professional relationship and responsibility

Nothing in this chapter shall be construed to alter any law applicable to the relationship between persons furnishing and receiving professional service, including but not limited to liability arising therefrom, and the shareholders of the corporation shall be and remain jointly and severally responsible for such liability.

OPINION

There is no ethical prohibition against an attorney's filing for bankruptcy protection under the federal bankruptcy laws. It would, however, be unethical for an attorney to file for bankruptcy relief if such a filing worked a fraud or deceit on any person or entity. See Michigan State Bar Informal Ethics Opinion CI-1037 (August 27, 1984) (ABA/BNA Lawyers' Manual on Professional Conduct, p. 801:4886); Nassau County Bar Association Ethics Opinion 88-47 (December 21, 1988) (ABA/BNA Lawyers' Manual, supra, p. 901:6266). See also Florida Board of Bar Examiners re Groot, 365 So. 2d 164 (Fla. 1978); Florida Board of Bar Examiners re: G.W.L., 364 So.2d 454 (Fla. 1978); Application of Gahan, 279 N.W.2d 826 (Minn. 1979); Annot., 4 A.L.R. 4th 436- 441 (1981) (concerning how the failure to pay creditors affects an applicant’s moral character for purposes of admission to the Bar).

It would also be improper for an attorney to continue to represent a client where the filing of the attorney’s bankruptcy proceeding would create a conflict of interest between the attorney and that client. Such situations are, of course, fact intensive and need to be addressed on a case-by-case basis. However, if the inquiring attorney concludes, under the terms of ER 1.7 (b), that the bankruptcy proceeding would "materially limit" his representation of a client, then he is required to withdraw from representation of that client.

In the facts presented, we can see nothing fraudulent or deceitful for the attorney suffering from financial hardships to seek and enjoy the full protection of the bankruptcy courts. Other ethics decisions, principally from New York, support this view. See e.g., New York State Bar Association Opinion 269 (October 20, 1972) 45 N.Y.S.B.J. 56 (January, 1973); New York City Bar Association Opinions 194 (old no. 239) (July 9, 1931), and 279 (old no. 368) (July 19, 1933); and Drinker, Legal Ethics (1953), p. 94.

Provided that there is no fraud, deceit, or conflict of interest involved, it is the committee’s opinion that:

1. It would not be violative of the Rules of Professional Conduct for a member of the State Bar to file Chapter 7 liquidation proceedings under the bankruptcy laws for his professional corporation and for himself personally;

2. It would not be violative of the Rules of Professional Conduct for a member of the State Bar, in filing Chapter 7 bankruptcy proceedings for his professional corporation and for himself personally, to seek to extinguish any dischargeable malpractice claims by the member’s clients;

3. It would not be violative of the Rules of Professional Conduct for a member of the State Bar, in filing Chapter 7 bankruptcy proceedings for his professional corporation and for himself personally, to seek to discharge a claim of a landlord who is also a client of the member; and

4. It would not be violative of the Rules of Professional Conduct for a member of the State Bar, in his Chapter 7 bankruptcy proceedings, to seek the discharge of any claims for contribution by the member’s former partners or law firm as a result of the pending legal malpractice case.[1]

©State Bar of Arizona 1991

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[[1] Note: Under A.R. S. § 10-905, the bankruptcy of the attorney’s professional corporation would not protect the attorney personally from individual liability for the malpractice claim. If the attorney were also to file personal bankruptcy, the malpractice claim could potentially be discharged in bankruptcy.]