ETHICS OPINION 563-1968 DISCLOSURE IN BANKRUPTCY PROCEEDINGS OF FRAUDULENT TRANSFER

NUMBER 563

QUESTION.

 

 

Kindly advise the writer, who is a member of the New York County Lawyers’ Association, whether the initiation of proceedings to set aside transfers and conveyances apparently fraudulent as to creditors will contravene the Canons of Professional Ethics under the following facts:

 

I was substituted as attorney for debtors in possession in a Chapter XI reorganization proceeding in the Federal Court. The debtors consist of a partnership and its two partners who are husband and wife and are the debtors in possession by Court appointment, The capital assets of the partnership are the sole property of the wife. Before I entered the case the creditors had accepted a rearrangement plan whereby they agreed to accept twenty (20%) per cent of their claims in full satisfaction of the debts owed them by the partnership and the partner wife and ten (10%) per cent of their claims in full satisfaction of their claims owed them by the partner husband, No credit or assets were available at that time to carry out this arrangement. As a result of various litigation and of my efforts, sufficient moneys and property of the partner wife were recovered to warrant payment of one hundred (100%) per cent of the claims against the partnership and the partner wife and its and her plan were so amended. No cash or assets were recovered for the individual partner husband. On my application for allowance for services rendered by me, the Court in its preliminary ruling following the decided cases, has stated that no allowance for such services can be made against the partner who has no assets even though legal services were rendered to him in reducing his individual taxes and individual debts.

 

From the work notes* of the lawyer who represented these debtors and debtors in possession prior to me and from my handling of the matter, it appears that valuable land and property were deeded and transferred from the husband individually to the wife individually prior to the partnership while the husband owed substantial federal taxes and apparently other creditors which he still has

 

In order to recover any money or property for the husband’s estate, a receiver or trustee would be required to handle claims against him and/or his wife Bartle v Markson, (2d Cir 1965), 357 F, 2d 417, 524 **

 

Would it be unethical for me to suggest to or initiate such proceedings before the Referee in Bankruptcy to whom both the entire rearrangement proceeding and the contest on my allowances has been referred?

 

ANSWER.

 

Under 11 USCA, §742 of the Bankruptcy Act, a debtor in possession has the responsibilities of a trustee He is an officer of the court and must act primarily for the benefit of all creditors, In re Austin (DCNY 1944) 55 F, Supp 462, 8B CJS, p, 501

Canon 32 of the Canons of Professional Ethics, requires an attorney to render service or give advice “tending to impress upon the client and his undertaking exact compliance with the strictest principles of moral law” See also Canon 16 and Opinion #358 of the Opinions on Professional Ethics of the Bar Association of the City of New York

On the facts stated, the attorney should advise the debtor to reveal the information concerning the property previously and fraudulently transferred, and if he does not do so, the attorney may properly disclose such information to the court.

The fact that the disclosure will inure to the benefit of the attorney by creating a fund out of which his fee may be collected is not sufficient reason to bar disclosure. Cf, Formal Opinion  #250 of the American Bar Association.

 

July 22, 1968

 

*”. . . Mr los t money in prior enterprises and for this reason he has some creditors and tax creditors. . . About 10 years ago, Mr deeded to his wife some lots in , these lots are new worth about $150,000. . .”

 

**”[15] . . .Where the reopening is for sole purpose of prosecuting claims, and especially claims against officers or directors of the debtor, which are the debtor’s only remaining assets, we see nothing inconsistent with the scheme of Chapter XI in the court’s appointing a trustee rather than following the tortuous path of having the creditors require the debtor in possession to sue its own officers or directors–very likely with special counsel appointed to insure independence, of. In re Martin Custom Made Tires Corp , 108 F, 2d 172 (2 Cir 1939), In re National Pub Serv Corp , 68 P 2d 859, 862-863 (2 Cir), cert denied Utilities Power & light Corp. v. Irving Trust Co., 292 U.S. 641, 54 S Ct, 773, 78 L Ed 1492 (1934); Weintraub & Levin, Practical Guide to Bankruptcy and Debtor Relief 201 (1964).”