DFWMM Holdings sought to have its judgments determined to be nondischargeable and the Mr. Richmond's discharge denied, supporting its allegations by arguing that Mr. Richmond made false statements in the bankruptcy case by failing to disclose that his claimed exemptions had been rejected in state court, that he misrepresented the nature and value of his business, his income and failed to disclose assets, including a Harley Davidson. Mr. Richmond answered in the bankruptcy court ( Richmond did not file any brief in the district court appeal) that to the extent these were failures, that he did not have any fraudulent intent as he had relied on the advice of counsel in preparing his bankruptcy petition.
The district court, affirming the bankruptcy decision, held that reliance on counsel is an affirmative defense that "absolves a debtor of fraudulent intent" when two conditions are met:
- The attorney was fully informed at the time the advice was given; and
- The debtor's reliance on the advice was reasonable.
Further, the district court found that the bankruptcy court had sufficient basis for finding that while Mr. Richmond made certain false statements, those were not made with fraudulent intent, as the bankruptcy petition was prepared by the attorney, who certified (as all petitions require) that he had "no knowledge after an inquiry that the information in the schedules filed with the petition is incorrect."
While this case presents an opportunity for debtors to extricate themselves from allegations of fraudulent intent in false statement, it does place the debtor's attorney in a real ethical dilemma, as this affirmative defense does require that the attorney fall on their sword. While this would obviously not succeed where the debtor and attorney were colluding to make false statements, it might require that the attorney, with knowledge of the full facts, made mistaken legal decisions, potentially leading to a malpractice claim (which might be an asset of the bankruptcy estate) or worse. Whether the attorney can continue to represent a debtor with that potential conflict of interests is a further concern.
Those issues aside, the defense of reliance on an attorney could be raised against an assertion that a bankruptcy plan was proposed in bad faith, particularly as such plans in consumer cases are overwhelmingly the sole product of the attorney, with the unsophisticated debtor utterly relying on that lawyer's expertise.
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For a copy of the bankruptcy court opinion, please click here: