Inept Lawyers Spark Judge's Ire in Chapter 11 Cases

Lawyers seeking to handle Chapter 11 cases in the U.S. Bankruptcy Court for the Northern District of California have been warned: They had better be qualified, competent and carrying substantial malpractice insurance.

In a recent notice U.S. Bankruptcy Judge Alan Jaroslovsky said he has presided over a current wave of Chapter 11 cases filed by attorneys who lack the education and competence to handle them. As a result, he said he has seen "rampant errors" and "frequent malpractice" relating to the use of cash collateral, conflicts of interest and attorney compensation.

"I believe that there are very few bankruptcy lawyers other than state Bar-certified specialists who should be contemplating representation of Chapter 11 debtors in possession," Judge Jaroslovsky said. "A Chapter 11 is not just a big Chapter 13."

He noted that some attorneys have been allowing debtors to use cash collateral without court permission.

"There are procedures in place to obtain permission to use cash collateral," the judge said. "If you don't know them, you should not be taking Chapter 11 cases."

Judge Jaroslovsky also criticized the failure of many attorneys to differentiate between debtors and bankruptcy estates. He said this often leads to conflicts of interest and the lawyers' exposure to liability.

"If you represent a Chapter 11 debtor in possession, your client is the estate, not the debtor personally," he said.

The judge further warned attorneys not try to seek fixed compensation in Chapter 11 cases.

"You will be paid what I allow - period," he said. "I suggest you not spend retainers until your fees are allowed to avoid having to return money you have already spent."

Finally, Judge Jaroslovsky recommended that lawyers who take on Chapter 11 cases have substantial malpractice insurance as he will not approve their employment if they do not.

"If you are going 'bare,' don't even think about taking a Chapter 11 case," he said.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.