The case of the week comes from bankruptcy court, where a chapter 7 trustee moved to disqualify counsel for the debtors.  According to the trustee, debtors’ counsel had engaged in “professional malpractice” because he “(1) failed to claim as exempt Debtors’ interest in certain property that they indisputably were entitled to claim, (2) failed to amend Debtors’ schedules correctly after he was advised of the omissions, and (3) failed to competently and diligently respond to the Turnover Motion [requiring return of the debtors’ apparently exempt property].”  The trustee, moreover, stated that he planned to sue counsel for legal malpractice on behalf of the estate.  To be sure, mere accusations of malpractice do not typically warrant disqualification, but the trustee claimed that the conflicts rules required disqualification here “because [debtors’ counsel’s] interest would be in conflict with his clients’ interests if he took the position that it was Debtors’ actions, and not his own, that had precipitated the loss.”  In other words, the trustee claimed that “there is a significant risk that the representation of one or more clients will be materially limited . . . by a personal interest of the lawyer.”  Rule 1.7.

The court ultimately denied the motion for disqualification for essentially two reasons.  First, the court noted that “[a]ny potential malpractice action that may be commenced by the Trustee is not currently before me.”  On this point, the court also noted that any malpractice claim likely belonged to the debtors, not the estate, because the malpractice harmed only the debtors.[1]  Second, the court found it relevant that “Counsel’s competence, as mandated under Pa. R.P.C. 1.1, is the issue – not his integrity,” and “there has been no suggestion that Debtors are dissatisfied with Counsel’s services, and Counsel has not blamed Debtors for the errors in the schedules. . . .”

Although counsel thus won the disqualification battle, he may have lost the war.  The court went on to raise its statutory ability under 11 U.S.C. § 329 to order disgorgement of any unreasonable fees and ordered “Counsel to show cause why he should not be required to disgorge all compensation previously received in this case.”  The court further ordered “that Debtors are required to personally appear at the hearing on this matter so that the Court can determine whether Debtors understand the consequences of the Turnover Order and whether they understand they have a potential malpractice claim against Counsel, but wish him to continue to represent them in this case.”[2]

The full opinion is available here: In re Gress, No. 1:13-BK-06202 MDF, 2015 WL 1744165 (Bankr. M.D. Pa. Apr. 14, 2015).

[1]           See, e.g., O’Dowd v. Trueger, 233 F.3d 197, 204 (3d Cir. 2000). The bankruptcy court also questioned whether the trustee had standing even to bring the disqualification motion: “Though I am not persuaded that this expansive view of standing for disqualification of an opponent’s counsel is justified, based upon recent Third Circuit dicta that parties other than a former or current client may demand disqualification of opposing counsel, I will assume that the Trustee has standing to assert the disqualification issue.” See In re Pressman–Gutman Co., 459 F.3d 383, 402 n.20 (3d Cir. 2006).

[2]           On an attorney’s duty to disclose malpractice to the client, see for example N.J. Sup. Ct. Adv. Comm. on Prof’l Ethics Op. 684 (concluding that Rule 1.4 requires disclosure); Restatement (Third) of Law Governing Lawyers § 20 cmt. c (2000) (“If the lawyer’s conduct of the matter gives the client a substantial malpractice claim against the lawyer, the lawyer must disclose that to the client.”).