Friday, November 14, 2008

U.S. District Judge Rules That Debtor's Attorney's Withdrawal from Representation Can Be Conditioned on Refund of Attorney Fees & Waiver of Balance

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Muhlheim Boyd, LLP v. U.S. Trustee (In re Ryan)
District Court of Oregon Case No. 08-6250-HO

October 31, 2008

This unpublished opinion explores the interplay between the Oregon Rules of Professional Conduct and the U.S. District Court Local Rule 83.11(a) on the withdrawal of counsel. District Court Judge Michael Hogan ruled that bankruptcy judge Albert Radcliffe did not abuse his discretion when it offered debtor's attorney "the option of waiving its fees as a condition of withdrawal as counsel or continued representation of the debtor and the ability to seek fees."

Muhlheim Boyd LLP (Muhlheim) was substituted as counsel for an individual Chapter 7 debtor after the U.S. Trustee moved to dismiss the case for abuse and debtor's original attorney (probably sensibly) determined that she did not have sufficient expertise to continue to represent her. Debtor paid Muhlheim a retainer of $1,000. After working with the assigned Muhlheim attorney "over several weeks," the debtor "determined that it was not worth paying [Muhlheim] to proceed further with the case"--she "decided she could not afford it and asked [Muhlheim] to withdraw from representation." She was not dissatisfied with the firm's services, but said "that she was ready to proceed pro se." She "later asserted that she would love to be represented but that she can't afford it."

Muhlheim filed a motion to withdraw, to which the U.S. Trustee objected on the basis that there were pending discovery requests and other deadlines. At a hearing on this motion Judge Radcliffe did not accept Muhlheim's argument that it could no longer ethically represent the debtor because the debtor had discharged the firm, determining that "the withdrawal was sought for financial reasons." The judge noted that the original attorney would likely be refunding to debtor part of the $1,700 she had paid to her, funds which could be available to pay Muhlheim. So Judge Radclifffe gave Muhlheim three days to either refund the $1,000 retainer and be withdrawn from the case, or else the motion to withdraw would be denied. The next day Muhlheim refunded the $1,000. The "Trustee" (U.S.Trustee?) then sought clarification whether Muhlheim could ask for attorney fees for its services, and in the meantime the original attorney refunded all of her fees. Judge Radcliffe "clarified its order regarding withdrawal to note that unless [Muhlheim's attorney] files a declaration within 5 days that he is not waiving his fees, his motion to withdraw is granted and his fees are deemed waived and that if such declaration is filed, the motion to withdraw is denied and he is permitted to require payment for the $1,000 previously refunded." Muhlheim challenged this order on the basis that it violated the Oregon Rules of Professional Conduct and the Bankruptcy Code, and sought to have the order amended. Judge Radcliffe denied this motion. Muhlheim appealed.

Judge Hogan's Specific Holdings and Rationales

1) Oregon Rules of Professional Conduct 1.16: Judge Radcliffe did not abuse his discretion in conditioning Muhlheim's withdrawal as counsel on its refunding and waiving of all attorney fees, since the judge had considered all of the pertinent issues "and made a compromise." "[D]ispite the unusual ruling, it cannot be said such a compromise is an abuse of discretion." And as for Muhlheim's assertion that to continue representation after being discharged by its client was unethical under Oregon Rules of Professional Conduct 1.16(a) (which states that "a lawyer . . . shall withdraw from the representation of a client if: . . . the lawyer is discharged"), Judge Hogan pointed out that ORPC 1.16(a) is expressly conditioned on ORPC 1.16(c), which states:
A lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.
2) Section 329 of the Bankruptcy Code: In response to Muhlheim's argument "that it was denied notice and a hearing about its property right to fees for its services," Judge Hogan agreed that the "Ninth Circuit has noted that some sort of notice and hearing is required if the bankruptcy court materially reduces the amount sought by a fee applicant." He remanded to the bankruptcy court to give Muhlheim an opportunity to present legal argument and evidence about its fees.

Curious Sidenote about Application of
Local Rule
Judge Hogan referred for support of his position to LR 83.11(a) of the U.S. District Court's Local Rules of Civil Procedure. This Local Rule states in pertinent part that "An attorney may withdraw as counsel of record only with leave of Court, if doing so leaves the party unrepresented or without local counsel." But this Local Rule appears not to be applicable to bankruptcy court. LR 2100.3(b) states that the "bankruptcy court Local Rules . . . apply to all matters before a bankruptcy judge." Local Bankruptcy Rule 9029-3 states that "LR's 2100 - 2300 apply to cases and adversary proceedings in this court. The other LR's do not apply unless specifically referred to in an LBR." I have found no LBR that specifically refers to LR 83.11(a). So it was not applicable to the case before Judge Radcliffe.

The Bottom Line

1) Be well aware that ORPC 1.16(c) allows any judge to require an attorney to continue representation even in the face of good cause for ending representation. And an appellate judge will be very reluctant to second-guess a trial judge's exercise of discretion between these inherently competing interests.

2) Judge Radcliffe understandably tried to provide for the debtor the funds with which to pay for continued representation. But his "compromise," at least from the information in Judge Hogan's opinion,
seemed to give nothing to the two debtor's attorneys and take everything away from them.

The original attorney, who presumably earned most if not all of her $1,700 of fees for counseling the debtor, preparing the petition documents, attending the meeting of creditors, and dealing preliminarily with the U.S. Trustee's abuse challenge, was forced to refund all her fees, apparently giving no credit at all to her efforts.

Then Judge Radcliffe gave Muhlheim the seemingly unfair choice of surrendering all of its $1,000 retainer, at least some of which it presumably had legitimately earned, in order to be permitted to withdraw from representation. At that time, accordin to Judge Hogan, the "court indicated that [the original attorney] would likely be required to refund a portion of the $1700 [debtor] had paid her for representation which could be used to pay Muhlheim ... ." Under these circumstances, the Muhlheim attorney, represented to the judge at that hearing that the firm would refund the retainer. On the very next day after that hearing, not knowing whether the original attorney would indeed refund her fees but reasonably relying on being able to request to be paid from such a potential refund, Muhlheim refunded its own $1,000 retainer. Then a few days later the original attorney did refund all of her fees. But another two days later Judge Radcliffe "clarified its order," imposed a NEW condition for Muhlheim's withdrawal,
now requiring it to waive its fees or else continue representation.

Although I recognize that I do not know the full story as it unfolded before the judge, his imposition of this second condition, after Muhlheim acted in reasonable reliance and satisfied the first condition, seems like insult on injury. The real lesson: the time-honored principles of contract law do not apply to judges.

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

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