CABAR 2014-12-16

If a California lawyer represents a debtor in a pro bono simple, no-asset Chapter 7 bankruptcy and concurrently represents one of the debtor's creditors in an unrelated matter, must the lawyer obtain informed written consent from both clients?

Short answer: Per California Formal Opinion 2014-191, no informed written consent is required under former Rule 3-310(C)(3) because a simple, no-asset Chapter 7 is an in rem proceeding that does not create direct adversity between debtor and creditor, provided the pro bono program prescreens to confirm no objections to discharge or other adverse posture; the lawyer must still give written notice of the relationship to the debtor-client under former Rule 3-310(B)(1).

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.

View original ethics opinion (PDF)

State Bar of California COPRAC Formal Opinion 2014-191: Concurrent Representation of Pro Bono Chapter 7 Debtor and Creditors

Short answer: The opinion concludes that simultaneous representation of a debtor in a simple, no-asset Chapter 7 bankruptcy and that debtor's creditors in unrelated matters does not create adversity triggering the informed written consent requirement of former Rule 3-310(C)(3), provided that the engagement is limited and intake procedures confirm that the Chapter 7 proceeding remains an in rem matter focused on discharge and distribution; the lawyer must still give written notice of the relationship under former Rule 3-310(B)(1).

Currency note

This opinion was issued in 2014, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former Rules 3-310 (avoiding adverse interests; now Rule 1.7), 3-310(B)(1) (notice of relationships), 3-310(C)(3) (concurrent client conflicts), 1-650 (limited legal services programs; now Rule 6.5), and 3-500 (client communication). Business and Professions Code section 6068(m) and the Bankruptcy Code references remain in force. Subsequent rule amendments or later opinions may have changed parts of 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 Treat this page as historical context, not current guidance.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.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The opinion analyzes a hypothetical in which Attorney participates in a pro bono program sponsored by Agency, helping individual debtors file Chapter 7 petitions. Agency prescreens potential clients to ensure the case is a simple, no-asset bankruptcy (no non-exempt assets, no anticipated objections to discharge, no claims by debtor against any creditor). Attorney is engaged by Debtor-Client. Attorney already represents one of Debtor-Client's creditors (Creditor-Client) in an unrelated matter. The question is whether former Rule 3-310(C)(3) requires informed written consent from both clients.

On the conflict analysis, the opinion concludes no informed written consent is required. Former Rule 3-310(C)(3) prohibits a lawyer from representing a client in a matter and simultaneously accepting a person whose interest is "adverse" in the first matter, absent informed written consent. The committee, drawing on Association of the Bar of the City of New York Opinion 2005-01 and Boston Bar Association Opinion 2008-1, holds that a typical Chapter 7 proceeding is an in rem matter, not an adversarial one. The court "undertakes to determine all claims that anyone has to the thing in question" (citing Restatement 2d of Judgments section 6 Comment (a) and Woodruff v. Taylor (1847)). The Supreme Court in Central Virginia Community College v. Katz (2006) and Gardner v. New Jersey (1947) confirms that "bankruptcy jurisdiction, at its core, is in rem." Absent specific claims between debtor and creditor, the focus is the bankruptcy estate, not the parties.

On the Bankruptcy Code analogy, the opinion looks to section 327(c), which provides that an attorney may represent a Chapter 7 trustee even though the attorney simultaneously represents a creditor in an unrelated matter, unless an objection is made. The committee cites In re Fondiller (9th Cir. BAP 1981), In re McKinney Ranch Associates (Bankr. C.D. Cal. 1986), and In re Dynamark, Ltd. (Bankr. S.D. Cal. 1991), holding that any remote potential conflict from unrelated creditor representation does not require disqualification. In re Envirodyne Industries (Bankr. N.D. Ill. 1993) is noted as contrary authority.

On limitations, the opinion is careful to confine the holding. The committee notes that the conclusion depends on (i) effective prescreening to ensure the case is and remains a simple, no-asset matter; (ii) absence of a single-creditor scenario where the Chapter 7 filing could appear "more directly aimed" at that creditor (citing City of New York Opinion 2005-01); (iii) absence of creditor objections to discharge under 11 U.S.C. section 727; and (iv) the engagement not extending beyond the section 341(a) meeting into adversarial proceedings. The committee notes that former Rule 1-650 (limited legal services programs) does not provide the basis for the holding because Attorney knows of the conflict and the representation exceeds initial advice.

On notice, the opinion concludes that even though informed written consent is not required, former Rule 3-310(B)(1) requires written notice to Debtor-Client of Attorney's professional relationship with Creditor-Client. Business and Professions Code section 6068(m) and former Rule 3-500 also support a disclosure obligation.

In practice

Under this opinion, conduct that was consistent with California's rules as they stood at the time is conduct in which the lawyer (i) takes pro bono Chapter 7 referrals only through a program that prescreens for simple no-asset cases with no anticipated objection to discharge and no claims between debtor and any creditor; (ii) treats the absence of any of those conditions as taking the case outside the holding and requires standard former Rule 3-310(C) analysis; (iii) gives written notice under former Rule 3-310(B)(1), former Rule 3-500, and section 6068(m) to the debtor of the unrelated creditor relationship even though informed written consent is not separately required; and (iv) does not extend the representation beyond the section 341(a) meeting into adversarial proceedings against the creditor. Verify against current Rule 1.7, current Rule 6.5, and current bankruptcy practice before relying on this framework.

Common questions

Q: Do California's conflict-of-interest rules treat all concurrent representations the same?

A: Per the opinion, no. Former Rule 3-310(C)(3) governs direct concurrent client adversity, but the committee holds that "ostensible adversity" that does not trigger the policies of the rule (such as positional conflicts under California State Bar Formal Opinion 1989-108, or the in rem nature of a Chapter 7) does not require informed written consent. The committee also cites the Discussion to Rule 3-310 noting that State Farm Mutual Auto Insurance Co. v. Federal Insurance Co. (1999) does not extend to insurance tripartite indemnity relationships.

Q: What makes a Chapter 7 simple and no-asset enough to qualify?

A: Per the opinion, the prescreening process must confirm (i) no non-exempt assets; (ii) no anticipated creditor objections to discharge under 11 U.S.C. section 727; (iii) no active litigation between the debtor and any creditor; (iv) no potential asset concealment or transfer; (v) no debtor claims against particular creditors; and (vi) no facts indicating bad faith by the debtor. If any of these arise, the case is rejected or, if discovered later, the lawyer withdraws.

Q: Is the lawyer relieved of any disclosure obligation?

A: Per the opinion, no. The committee holds that even though informed written consent is not required under former Rule 3-310(C)(3), former Rule 3-310(B)(1) requires written notice to the debtor-client of the lawyer's existing professional relationship with the creditor. Business and Professions Code section 6068(m) and former Rule 3-500 separately support disclosure. The committee notes the omission of a consent requirement is not an omission of any disclosure obligation.

Q: What if Debtor-Client only has one creditor, who is the Creditor-Client?

A: Per the opinion, that is outside the holding. The committee notes the City of New York opinion's observation that where the debtor has only a single creditor, on the verge of collection action, the Chapter 7 filing "could have at least the appearance of being more directly aimed at that particular creditor." The committee declines to enumerate every scenario that could give rise to direct adversity, but signals that the in rem theory does not extend to such single-creditor or pre-adversarial postures.

Q: Does this analysis apply outside pro bono settings?

A: Per the opinion, the conclusion does not depend on pro bono status. The committee notes that neither the New York nor the Boston opinion relied on the pro bono nature of the services; both relied on the in rem character of a typical Chapter 7. Footnote 3 cautions, however, that non-pro-bono contexts raise fee sharing and third-party prescreening issues not addressed in the opinion.

Background and rules framework

The opinion interprets former California Rules 1-100(A) (use of other jurisdictions' materials), 1-650 (limited legal services programs), 3-310(B)(1) and (C)(3) (notice and conflicts), and 3-500 (client communication), together with Business and Professions Code section 6068(m). The committee uses Bankruptcy Code sections 327, 522, 541, and 727 and the section 341(a) meeting structure as the in rem framework, supported by federal case law and Supreme Court bankruptcy jurisprudence.

Citations and references

Rules of Professional Conduct (former, in effect at time of opinion):

Former California Rule 1-100(A) (use of other-jurisdiction materials)
Former California Rule 1-650 (limited legal services programs)
Former California Rule 3-310 (avoiding representation of adverse interests), including (B)(1) and (C)(3)
Former California Rule 3-500 (client communication)
ABA Model Rule 6.5 (referenced via 1-650 successor framework)

Statutes:

California Business and Professions Code section 6068(m)
11 U.S.C. section 101 et seq. (Bankruptcy Code)
11 U.S.C. section 327(a), (c) (court approval of professional employment)
11 U.S.C. section 522 (exemptions)
11 U.S.C. section 727 (discharge)
Bankruptcy Code section 341(a) (meeting of creditors)

Cases:

Flatt v. Superior Court (1994) 9 Cal.4th 275, concurrent client conflicts
State Farm Mutual Auto Insurance Co. v. Federal Insurance Co. (1999) 72 Cal.App.4th 1422, direct action against current client
State Compensation Insurance Fund v. WPS, Inc. (1999) 70 Cal.App.4th 644, use of other-jurisdiction materials
City & County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, same
Central Virginia Community College v. Katz (2006) 546 U.S. 356, bankruptcy jurisdiction in rem
Gardner v. New Jersey (1947) 329 U.S. 565, adjudication of interests in a res
Shawhan v. Wherritt (1849) 48 U.S. 627, bankruptcy as in rem
Woodruff v. Taylor (1847) 20 Vt. 65, definition of in rem
In re Soileau (5th Cir. 2007) 488 F.3d 302, bankruptcy jurisdiction
In re Fondiller (Bankr. 9th Cir. 1981) 15 B.R. 890, interpretation of section 327(a) adverse interest
In re McKinney Ranch Associates (Bankr. C.D. Cal. 1986) 62 B.R. 249, scope of disqualification rules
In re Dynamark, Ltd. (Bankr. S.D. Cal. 1991) 137 B.R. 380, unrelated creditor representation too remote
In re Envirodyne Industries, Inc. (Bankr. N.D. Ill. 1993) 150 B.R. 1008, contrary authority

Other opinions cited:

California State Bar Formal Opinion 1989-108: positional or issues conflicts
Association of the Bar of the City of New York Committee on Professional and Judicial Ethics Formal Opinion 2005-01: pro bono consumer bankruptcy representation
Boston Bar Association Ethics Committee Opinion 2008-01: same topic, Massachusetts rules

Source

Original opinion text

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

THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2014-191

ISSUE: If an attorney represents an individual as a debtor in a simple, no-asset Chapter 7 bankruptcy filing, while simultaneously representing one or more of the individual's creditors in unrelated matters, is the attorney required by rule 3-310(C)(3) to obtain informed written consent from both parties?

DIGEST: Simultaneous representation of a debtor in a simple, no-asset Chapter 7 bankruptcy filing and that debtor's creditors in unrelated matters does not create adversity triggering the informed written consent requirement of rule 3-310(C)(3), provided that the engagement is limited and certain intake procedures are employed to ensure that the Chapter 7 proceeding in which the attorney is involved is an in rem proceeding that focuses on the orderly distribution of the debtor's assets and the discharge of debts.

AUTHORITIES INTERPRETED: Rules 1-100, 1-650, 3-310 and 3-500 of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code section 6068(m).

STATEMENT OF FACTS

Attorney participates in a pro bono program sponsored by a non-profit agency ("Agency") helping individual debtors prepare for and commence Chapter 7 bankruptcy proceedings. The Agency prescreens potential clients, which includes a review of debts, assets and income, to ensure there are no facts indicating that the matter is anything other than a simple, no-asset bankruptcy. The Agency also assesses whether the potential client has any claims against any creditor, or whether any creditor may have a claim other than the debt against the potential client. Once prescreened, Attorney reviews a client's financial situation and confirms that a bankruptcy is an appropriate remedy for such client. The assessment includes reviewing the amount and nature of the client's assets, income and debts and determining if bankruptcy is the best way to resolve the financial difficulties for the client. In some cases, the engagement ends at that point. In others cases, Attorney prepares the necessary paper work to file a Chapter 7 proceeding. And in other cases, Attorney represents a client in the Chapter 7 proceeding through the section 341(a) meeting of creditors.

Attorney is engaged by one such individual ("Debtor-Client") through the pro bono program. Attorney is aware that he currently represents one of Debtor-Client's creditors in an unrelated matter ("Creditor-Client"). May Attorney proceed to represent Debtor-Client through the section 341(a) meeting of creditors despite his concurrent, unrelated representation of Creditor-Client, without securing the informed written consent of both parties pursuant to rule 3-310(C)(3)?

DISCUSSION

Attorneys are often limited in their ability to provide legal services due to conflicts of interest with their existing clients or with existing clients of their firm. Even if the matters are unrelated, an attorney generally may not represent a client in a matter adverse to another current client. Rule 3-310(C) (Avoiding the Representation of Adverse Interests); Flatt v. Superior Court (1994) 9 Cal.4th 275. Rule 3-310(C)(3) provides that a lawyer shall not "[r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter" without the informed written consent of each client. The question here is whether Attorney's concurrent representation of both Debtor-Client and Creditor-Client constitutes a conflict that would require the informed written consent of both clients.

The Committee recognizes that rule 3-310(C)(3) is intended to govern adversity involving concurrent client conflicts. However, there are situations in which ostensible adversity does not trigger the policies that 3-310(C)(3) is intended to promote and implement. Further, as we observed in Cal. State Bar Formal Opn. No. 1989-108, in certain adversity referred to as an "issues conflict" or "positional conflict," where an attorney represents two clients whose interests in the issue are adverse but who are not directly adverse (within the meaning of rule 3-310), disclosure to both clients is not required but would be prudent.

Ethics opinions from other jurisdictions, as well as some provisions of the Bankruptcy Code, while not binding, are informative as to whether or not written consent is required in this specific hypothetical. The Committee is not aware of any cases or opinions directly on point in California. Ethics opinions by both the Association of the Bar of the City of New York and the Boston Bar Association addressed this question in the context of pro bono projects. Both opinions came to the conclusion that in the typical case a conflict does not arise when a pro bono attorney represents an individual on a limited basis in connection with the filing of a Chapter 7 petition while simultaneously representing one or more of the individual's creditors in unrelated matters, negating the need for the lawyer to obtain written consent from his or her clients.

The City of New York opinion concluded that the filing of a Chapter 7 proceeding does not invoke the same kind of adversity as would litigation because it is an in rem proceeding. Thus, a lawyer may represent a debtor-client in such a proceeding even though he concurrently represents a creditor of that debtor-client in an unrelated matter, provided that the case remains a simple, no-asset bankruptcy (e.g., no creditor objects to the debtor-client's discharge of debt). The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics stated:

Unlike the commencement of litigation – which by definition is brought directly against one or more parties on behalf of another party with an adverse interest – the commencement of a typical Chapter 7 case is an in rem proceeding that triggers the automatic operation of a statutory framework for marshaling and distributing assets and discharging debt. Under that statutory framework, to the extent the debtor has non-exempt assets, those assets are distributed among the creditors in accordance with statutorily mandated criteria. To the extent debt is discharged (assuming no objection has been made to its discharge), that action likewise occurs by automatic operation of statute. In addition, to the extent adversary proceedings are brought by the Chapter 7 estate, the decision to do so is made by the court-appointed Chapter 7 trustee, not by the Chapter 7 debtor or his counsel.

The Chapter 7 statutory framework is one specifically intended to strike a fair balance between the rights of debtors and creditors, [citations] and, together with other provisions of the Bankruptcy Code, to ensure equality of treatment for creditors holding claims of equal priority. [Citations.] As a result, both debtors and creditors alike can be said to derive substantial benefit from the availability of Chapter 7 proceedings.

In light of the structure and purpose of the Chapter 7 statutory framework, we think it is reasonable to conclude that in the typical Chapter 7 case, there is no adversity between debtor and creditor sufficient to trigger the restrictions of DR 5-105 [the New York disciplinary rule on conflicts of interest] unless and until a creditor objects to the discharge of a debt or otherwise takes action that is directly adverse to the debtor.

The Boston opinion cited extensively to the City of New York opinion, but addressed it under Massachusetts rules rather than the (former) New York rules. In addition, the Boston opinion included an analogy to other sections of the Bankruptcy Code, particularly section 327(c):

Congress expressly addressed the question -- with respect to a later stage of a Chapter 7 proceeding -- whether representation by a lawyer should be viewed as giving rise to a disqualifying conflict of interest. After the Chapter 7 Petition has been filed, a trustee is appointed. The trustee reviews the assets of the bankruptcy estate and pursues or defends any claims the estate may have. The trustee may retain an attorney. The "Bankruptcy Code contemplates that attorneys will, in unrelated matters, have multiple representations involving creditors and the debtor."

Congress provided in Section 327(c) that unless there is an objection, a lawyer may proceed to represent the trustee of the bankruptcy estate, even though the lawyer also simultaneously represents a creditor (in an unrelated matter). In the view of Congress, such a scenario does not, per se, present a disqualifying conflict of interest. By inference, the lawyer's representation of the trustee is not viewed as a representation directly adverse to the creditor.

Since the Chapter 7 trustee may later engage an attorney who simultaneously represents one of the creditors (in an unrelated matter), it seems natural that when the debtor initiates the Chapter 7 process, likewise, the debtor may engage an attorney who simultaneously represents one of the creditors (in an unrelated matter). Thus Section 327(c) teaches us, by analogy, that the scenario under consideration does not present a per se conflict of interest.

Neither the City of New York nor the Boston opinion expressly relied on the pro bono nature of the services being provided. Rather, they both reached this result based on the nature of a Chapter 7 Bankruptcy proceeding. "Critical features of every bankruptcy proceeding are the exercise of exclusive jurisdiction over all of the debtor's property, the equitable distribution of that property among the debtor's creditors, and the ultimate discharge that gives the debtor a 'fresh start' by releasing him, her, or it from further liability for old debts." Central Virginia Community College v. Katz (2006) 546 U.S. 356, 363 – 64. Absent specific claims between the debtor and one or more creditors, the focus of the case is the bankruptcy estate, not the individual parties. The goal is the gathering of the assets and debts, and the orderly and equitable distribution of the non-exempt assets (if any) to the creditors. The proceeding is essentially in rem, rather than adversarial. See Central Virginia Community College, supra, 546 U.S. at p. 362 ("Bankruptcy jurisdiction, at its core, is in rem."). See also In re Soileau (5th Cir. 2007) 488 F.3d 302, 307; Shawhan v. Wherritt (1849) 48 U.S. 627, 643. As the Supreme Court explained in Gardner v. New Jersey (1947) 329 U.S. 565, 574: "The whole process of proof, allowance, and distribution is, shortly speaking, an adjudication of interests claimed in a res."

In a typical Chapter 7 proceeding, the individual debtor's debts are discharged, and the debtor's non-exempt assets, if any, are distributed to his or her creditors, with little dispute. Under the facts of this opinion, the Agency prescreens for scenarios that would make the case atypical, such as the presence of non-exempt assets, active litigation, potential concealment or transfer of assets, claims by Debtor-Client against particular debts or creditors, and facts indicating bad faith on the part of Debtor-Client. If Agency detects such scenarios, the case is rejected and the client is referred to an outside attorney. If Attorney detects such scenarios, he or she does not take on the representation (or withdraws from the representation if he or she detects such scenarios after taking on the representation) both under the rules of the program and to prevent conflict problems under rule 3-310(C). In any case, the services provided by Attorney do not include representing the client in true, adversarial actions against creditors. Absent such atypical scenarios, Attorney assisting the Chapter 7 individual debtor would be providing a net benefit to the estate by ensuring accurate and complete documentation of the Chapter 7 petition and ancillary filings.

The Bankruptcy Code provides support for this conclusion in a similar situation. Under section 327, the court must approve the post-petition hiring of counsel for the debtor or the trustee in a Chapter 11 proceeding. Section 327(a) provides, with the court's approval, the trustee "may employ one or more attorneys . . . that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee . . . ." In In re Fondiller (Bankr. 9th Cir. 1981) 15 B.R. 890, 892, the United States Bankruptcy Appellate Panel of the Ninth Circuit stated: "We interpret that part of s[ection] 327(a) which reads that attorneys for the trustee may 'not hold or represent an interest adverse to the estate' to mean that the attorney must not represent an adverse interest relating to the services which are to be performed by that attorney." (Emphasis added.) Under section 327(c), unless there is an objection, an attorney may represent the trustee, even though the attorney simultaneously represents a creditor in an unrelated matter. In the case of In re McKinney Ranch Associates (Bankr. C.D. Cal. 1986) 62 B.R. 249, 255, the court, after an analysis of the history of conflict rules and of section 327, stated: "The policy behind disqualification for representing potentially conflicting interests provides the key to its extent. The jaundiced eye and scowling mien of counsel for the debtor should fall upon all who have done business with the debtor recently enough to be potential targets for the recovery of assets of the estate. The representation of any such party disqualifies counsel from representing a debtor. Any more remote potential conflict should not result in disqualification."

In In re Dynamark, Ltd. (Bankr. S.D. Cal. 1991) 137 B.R. 380, the court found that there was no conflict preventing a law firm from representing both the creditor and the debtor. The opinion stated: "In the instant case, [the attorney] continues to represent [the creditor] on matters totally unrelated to the Chapter 11 proceeding. Thus, any potential conflict that may exist is too remote to warrant disqualification on these grounds." But see In re Envirodyne Industries, Inc. (Bankr. N.D. Ill. 1993) 150 B.R. 1008, 1018 (disagreeing with the Dynamark court's use of a balancing approach).

Because a simple Chapter 7 proceeding is in rem, it is the assets and debts of the debtor that are the party to the case, and in effect not the debtor or creditor directly. If a more complicated matter arises in the bankruptcy proceeding, the normal conflicts rules for representing adverse parties would apply. In the facts of this opinion there is no adversarial proceeding and the representation does not create a conflict that would disqualify Attorney from filing the proceeding and appearing at the section 341(a) meeting without the informed written consent of both clients.

While the Committee finds that no conflict exists under rule 3-310(C) requiring informed consent, written notice is required under rule 3-310(B). Rule 3-310(B)(1) requires written notice to the client when a lawyer has "a legal, business, financial, professional, or personal relationship with a party or witness in the same matter . . . ." Attorney in this case has a professional relationship with a creditor, and must disclose that information to Debtor-Client. See also Business and Professions Code section 6068(m) and rule 3-500.

CONCLUSION

If a potential debtor-client is adequately prescreened through a pro bono program like the one in our hypothetical facts to ensure that a simple, no-asset Chapter 7 bankruptcy proceeding is an in rem proceeding that focuses solely on the discharge of debts, a lawyer may represent the debtor-client, without first obtaining written consent, even if the attorney concurrently represents one or more creditors of the debtor-client in unrelated matters, so long as the proceeding remains a simple, no-asset Chapter 7 bankruptcy.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding on the courts, the State Bar of California, its Board of Trustees, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

[Publisher's Note: Internet resources cited in this opinion were last accessed by staff on December 16, 2014. A copy of these resources is on file with the State Bar's Office of Professional Competence.]