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January 16, 2015

In Re McIntosh 2015 WL 241130

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The Bankruptcy Court denies a fee application, and orders a refund of fees already paid, in response to a flagrant breach of loyalty by an attorney.

Deborah McIntosh hired David N. Chandler to represent her in a bankruptcy. During the bankruptcy proceedings, Chandler argued a deed of trust on McIntosh’s home should be invalidated under state law, not be preserved for the benefit of the bankruptcy estate.  He advocated the equity created by invalidating the deed of trust should pay McIntosh her homestead exemption.

After he was terminated by McIntosh, Chandler moved for his fees. He argued the same deed of trust was avoided under the Bankruptcy Code, was automatically preserved for the benefit of the bankruptcy estate, and that all proceeds must pay claims of unsecured creditors, his fees. 

Chandler’s motion directly contradicted the original petition he filed on behalf of the McIntosh, and the confirmed plan he drafted that specified the equity was for McIntosh’s homestead exemption. The Court found that Chandler’s position was incorrect as a matter of bankruptcy law.

The Court held Chandler violated his duty of loyalty to his former client, McIntosh.  The breach of loyalty was not the attempt to collect fees.  The breach arose from attacking a position he previously advocated on her behalf in the bankruptcy proceeding.

Under California law, the duty of loyalty continues after the client has discharged the attorney. The attorney may do nothing which will injuriously affect the former client in any matter in which the attorney formerly represented the client, regardless of whether the action involves the use or disclosure of confidential information. It is not limited to situations where the attorney represents a new client, but includes actions that benefit the attorney if it is injurious to a former client on a matter in which the attorney represented that client.

Chandler had already argued that the removal of the deed of trust was not preserved for the estate when he changed positions to argue that the equity created was preserved for the estate, and available for his fees.

Chandler argued he could take the position the equity preserved by invalidating the deed of trust was preserved for the bankruptcy estate, because he had advised McIntosh of a conflict and advised her to seek separate counsel. However, the court observed Chandler never obtained a written conflict waiver that would allow him to represent an adverse interest.

Chandler also relied on the fact that when he filed his fee position, the court had not yet decided if the equity had been preserved to the estate or to the debtor. The court held it did not matter whether the court had decided the issue, or whether Chandler’s position was legally correct. An attorney who advocates a position on behalf of a client cannot switch sides.

The court may deny some or all fees to an attorney who has breached ethical requirements. The court determined Chandler’s breach of ethical duty was so flagrant, he should be denied all fees, and be required to refund all fees he had previously received.   The complete reversal of position from one that benefitted his client to one that harmed her was stark.  Chandler made a blatant misrepresentation to the court changing positions.  He told the court the deed of trust was avoided under the Bankruptcy Code, when it had been avoided under state law.  The reason for the reversal was to collect fees, and deprive McIntosh of her important homestead exemption.  As an experienced bankruptcy attorney, Chandler understood this, as illustrated by the technical arguments he made on both sides of the argument.

Comment: This case clarifies licensure, reputation, and fees are at stake when an attorney’s ethical violations strike at the core of the representation.

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