Are your loyalties divided
When a married couple books a bankruptcy consultation, you have an immediate problem: There be dragons, as early map makers helpfully provided.
Because, as a lawyer friend of mine says:
Anytime there are two people sitting across from you, you have a conflict of interest.
That pithy expression has stuck with me and made me continually aware that even a happily married couple may have different legal interests. Add a little marital discord, and the opportunities for conflict blossom.
Duty of loyalty
The ABA Rule of Professional Conduct 1.7 addresses conflicts among current clients.
California, wouldn’t you know, has a slightly more verbose rule
… a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
Where are the conflicts between spouses
Two potential conflicts leap out at me:
- the treatment of separate property in a joint bankruptcy case
- claims of one spouse against the other
Take a look at any differences between the liability under state law of separate property of one spouse for debt, contrasted with the liability of property of the estate under Bankruptcy Code 726. Under California law, one spouse’s separate property would not be liable for debts of the other spouse; under 726, separate property IS liable for those debts.
So the interests of the two spouses sitting across from your desk may be adverse in ways they’ve never considered.
Divorce is a difficult process that involves and financial agreements. When the couple is planning or in the midst of a divorce, there is the possibility of claims one spouse may have against the other for breach of fiduciary duty.
Query whether a discharge in a joint bankruptcy would bar such claims as the divorce proceeded.
So one of the questions on my screening questionnaire that new clients fill out before we sit down asks if they are separated from their spouse or considering divorce. If the answer is yes, we proceed with caution.
Coping with conflicts
I have no hard and fast rules on what to do when they acknowledge they are heading for divorce. But, it triggers the discussion about conflicts with the couple.
I need to assess whether they appear to be able to communicate and work together toward getting out of debt.
- Are they each ready to make full disclosure of assets and liabilities?
- What are the consequences of a deliberate omission on the other spouse?
- How are the expenses of responding to trustee inquiries targeted at one spouse to be paid?
- And then there is the cost of any adversaries that might be filed.
Further, I need to analyze and discuss with the couple whether separate bankruptcies would advantage one spouse or another. Without that, I haven’t done my job.
More often than in other situations, I tend to send out a letter following our meeting that makes a record of our discussion about conflicts.
If we, the couple and I, decide that I will represent them in a joint case, one of my ground rules is that anything either one tells me, I will be free to share with the other. In other words, I will not keep the secrets of one spouse from the other.
Further, if an actual and insurmountable conflict or divergence arises, they are told upfront that I will withdraw and represent neither of them going forward.
It’s worth remembering that while spouses are permitted to file a joint bankruptcy case, they are not required to.
Chapter 13 is different
Finally, if Chapter 13 is the prudent choice for them, in light of tax or real estate issues, I won’t represent a couple intending to separate in a joint 13. A successful 13 requires years of cooperation; the court doesn’t understand “my half of the payment” when there’s a financial default.
I can’t say these are foolproof practices or the only ones you can adopt. I can say you need to think the conflicts issue through before you become embroiled.
Steer clear of the dragons.