LegalEthicsforCounselRepresentingDebtorandCreditors

MichaelDowneyDowneyLawGroupLLC

May2017

WhenaLawyer?

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Scenario1• LawFirmcollectssignaturepagesforguaranteesoncorporate

loan• LawFirmattachessignaturepagestowrongdraftof

guarantee– Wrongdrafttriggersliabilityonguaranteeifanyguarantordeclares

bankruptcy;correctdraftdoesnot

• Guarantor#1filesforbankruptcy• Guarantor#2facesliabilityinmillionsandsuesLawFirmfor

malpractice

Ivanovichv.McKennaLong (Ill.App.1st Dist.2017)

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Plaintifffurtherassertsthatescrowservicesarenotlegalservices,citingtothecommentstoRule1.15oftheIllinoisRulesofProfessionalConduct.SeeIll.Sup.Ct.R.Prof'lConduct1.15cmt.5(eff.July1,2015).Commentfiveprovides,"TheobligationsofalawyerunderthisRuleareindependentofthosearisingfromactivityotherthanrenderinglegalservices.Forexample,alawyerwhoservesonlyasanescrowagentisgovernedbytheapplicablelawrelatingtofiduciarieseventhoughthelawyerdoesnotrenderlegalservicesinthetransactionandisnotgovernedbythisRule." Id.AswehavealreadydeterminedthatMcKenna'sallegedbreacharoseoutoftheperformanceofprofessionalservices,wefindthisprovisionisnotapplicable.

Weconcludesection13-214.3appliestoallclaimsthatarisefromtheprovisionofprofessionallegalservicesandplaintiff'sallegationsrelatetoMcKennainitsprofessionalcapacity.735ILCS5/13-214.3(West2014....Accordingly,thecourtdidnoterrinfindingthatplaintiff'sclaimsagainsttheattorneydefendantswereuntimely.

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WhoIstheClient?

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Scenario2

• HusbandandWifecontactLawyeraboutfilingforbankruptcy– OnespouseownsBadBusiness,LLC,whichhascausedHusbandandWifetobeinsolvent

• SeniorandJuniorLendercontactLawFirmaboutcollectingon$50Mlineofcredit

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FormationofAttorney-ClientRelationship(Restatement)

[A]personmanifests toalawyertheperson's intentthatthelawyerprovidelegalservices fortheperson;andeither

a) thelawyermanifeststothepersonconsent todoso;or

b)thelawyerfailstomanifestlackofconsent todoso,andthelawyerknowsorreasonablyshouldknowthatthepersonreasonablyrelies onthelawyertoprovidetheservices;

Restatement(Third)LawGoverningLawyers§ 14

Scenario3• DebtorborrowsmoneyfromBank• LoandocumentsincludedocumentempoweringAttorneyfor

Banktosignconfessionofjudgmentifdebtordefaults• Debtordefaults• AttorneyforBanksignsandfilesconfessionofjudgment

againstDebtor• DebtorsuesAttorneyforlegalmalpractice

BayGroupHealthCareLLCv.GinsbergJacobs(NDIll.2017)

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ConflictsofInterest

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Scenario4

• Creditor1approachesLawFirmregardingcollectingdebtfromDebtor

• Creditor2approaches(same)LawFirmregardingcollectingdebtfrom(same)Debtor

• DoesLawFirmhaveaconflict?

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JointRepresentationConflicts:MissouriRule4-1.7(a)

Exceptasprovidedinparagraph(b),alawyershallnotrepresentaclientiftherepresentationinvolvesaconcurrentconflictofinterest.Aconcurrentconflictofinterestexistsif:(1) …(2) thereisasignificantriskthattherepresentationofoneor

moreclientswillbemateriallylimitedbythelawyer'sresponsibilitiestoanotherclient,aformerclientorathirdpersonorbyapersonalinterestofthelawyer.

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ConflictWaiver

• Circumstances• Risks

– To"zeal"– To"confidences"

• Alternatives

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Scenario4(again)

• Creditor1approachesLawFirmregardingcollectingdebtfromDebtor

• Creditor2approaches(same)LawFirmregardingcollectingdebtfrom(same)Debtor

• DoesLawFirmhaveaconflict?

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ConflictforLawyer

ConflictedLawyerColleague ColleagueColleague

• DoesConflictaffectLawyer?

Rule4-1.7,4- 1.8,4- 1.9,

4-1.11,4-1.12,4-1.18

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ImputationofConflicts–ConflictforFirm

ConflictedLawyerColleague ColleagueColleague Colleague

• DoesConflictedLawyer'sconflictaffectLawyer'scolleagues?– Rule1.10(or1.8(k)or1.11or1.12)

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NoImputationWithScreen

ConflictedLawyerColleague Colleague

EthicalScreen EthicalScreen

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§327(a)– Employmentofprofessionalpersons

Exceptasotherwiseprovidedinthissection,thetrustee,withthecourt'sapproval,mayemployoneormoreattorneys,accountants,appraisers,auctioneers,orotherprofessionalpersons,thatdonotholdorrepresentaninterestadversetotheestate,andthataredisinterestedpersons,torepresentorassistthetrusteeincarryingoutthetrustee'sdutiesunderthistitle.

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§328(c)– Limitationsoncompensationofprofessionalpersons

Exceptasprovidedinsection327(c),327(e),or1107(b)ofthistitle,thecourtmaydenyallowanceofcompensationforservicesandreimbursementofexpensesofaprofessionalpersonemployedundersection327or1103ofthistitleif,atanytimeduringsuchprofessionalperson'semploymentundersection327or1103ofthistitle,suchprofessionalpersonisnotadisinterestedperson,orrepresentsorholdsaninterestadversetotheinterestoftheestatewithrespecttothematteronwhichsuchprofessionalpersonisemployed.

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TrustAccountingIssues

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Scenario6

• LawyeragreestofileChapter7bankruptcyforClient

• ClientpaysLawyer$1200fixedfee• WhereshouldLawyerputthefee?

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FirmOperatingAccount

TrustAccount

EarnedFeesAdvancesforfees(Retainers)and"OtherPeople's

Money"

BasicRuleonHandlingFundsPaidforLegalServices

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WorkPayment Payment

TrustAccount

Operating

Account

Earned

FlatFeesinAdvance:MissouriFormalOpinion128(2010)

• Webelievethatallflatfeesmustbedepositedintoalawyertrustaccountandpromptlyremovedwhenactuallyearned,similartopromptremovalofearnedhourlyfees.

• Flatfeescouldberemovedbaseduponreachingaparticularstageofacaseorbasedonsomeotherreasonablecriteria,dependingonthenatureandcircumstancesoftherepresentation.

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ReceivingFundsIntoTrust

MethodofPayment Funds"good"(received)

RiskofUnilateralCancelationorWithdrawal

Amountreceived

Cash Immediate None Amountpaid

Check

Minimumofseveraldaysanduptotwoweeks,*presumingnoattemptto"stop

payment"

None

(afterfundsarereceived)

Amountpaid

CreditCard SeveraldaysConsiderable– oftenforsixmonths(or

more)

Amountpaidlessfees

ElectronicFundTransfer Immediate None Amountpaid

DisbursingFundsfromTrust• Permitted

– Checkwithnamedpayee– Electronictransfertonamed

payee

• Notpermitted– counterchecks– cash-backtransactions

fromdeposits– ATMcardwithdrawals– debitcardtransactions

DisbursingTrustFundstoLawyer

Disbursedwhen"earned" – if fundsareinaccount(good)• Earnedperagreementwithclient

"Swept" fromaccount• Allfeesearnedshouldbe"swept" inonetransactionatone

time

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"Three-Way" Reconciliation

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RequiredTrustAccountDocumentation(Missouri)

(1) receiptanddisbursementjournals

(2) client-specificledgers(3) feeagreementsandsimilar

documents(4) accountingstatements

showingdisbursementsmade

(5) billsandexpensessenttoclients

(6) disbursementrecords(7) check-bookregistersand

bankstatementsortheequivalents

(8) electronictransferrecords(9) accountreconciliations(10)credit-cardtransaction

information

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Scenario7

• LawyeragreestofileChapter7bankruptcyforClient

• ClientpaysLawyer“non-refundable”$1200fixedfee

• Beforefiling,Clientterminatesrepresentation• HowmuchcanLawyerkeep?

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"Non-Refundable" FeesNotAllowed

MissouriFormalOpinion128

"Inthesesituationsandothers,thedescriptionofthefeeas'nonrefundable' ismisleading.Rule4-1.16(d)requiresanyfeethathasnotbeenearnedtoberefundedattheendoftherepresentation." MOFormalOpinion128(2010)

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"Intake" Fee• Reasonablefeechargedwhen"takingin" amatter

• Reflectslostopportunitytorepresentanotherparty

• Earnedupon"intake"

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Scenario8

• LawyeragreestofileChapter7bankruptcyforClient• ClientpaysLawyer$1200fixedfee• Beforefiling,Clientterminatesrepresentation• LawyerbelievesLawyershouldkeep$600;Clientdemandsreturnofentire$1200payment

• WhatdoesLawyerdowith$1200?

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Rule4-1.15(e)

Wheninthecourseofrepresentationalawyerisinpossessionofpropertyinwhichtwoormorepersons(oneofwhommaybethelawyer)claiminterests,thelawyershallkeepthepropertyseparateuntilthedisputeisresolved.Thelawyershallpromptlydistributeallportionsofthepropertyastowhichtheinterestsarenotindispute.Lawyersshallcooperateasnecessarytoenabledistributionoffundsthatarenotindispute.

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Scenario9

• LawyerforCompanylearnsthatEmployeeforCreditorisviolatingFairDebtCollectionPracticesAct

• WhomshouldLawyertell?

• DoesitmatterthatEmployeeisCEOand51%ownersofCompany?

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ReportingUp(andOut?)MORule4-1.13(c) If,despitethe

lawyer'seffortsinaccordancewithRule4-1.13(b),thehighestauthoritythatcanactonbehalfoftheorganizationinsistsuponaction,orarefusaltoact,thatisclearlyaviolationoflawandislikelytoresultinsubstantialinjurytotheorganization,thelawyermayresigninaccordancewithRule4-1.16.

Up

Out

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ReportingUpandOut– IllinoisIllinoisRule1.13(c) Exceptasprovidedinparagraph(d),if(1) despitethelawyer'seffortsinaccordance

withparagraph(b)thehighestauthoritythatcanactonbehalfoftheorganizationinsistsuponorfailstoaddressinatimelyandappropriatemanneranactionorarefusaltoact,thatisclearlyacrimeorfraud,and

(2) thelawyerreasonablybelievesthatthecrimeorfraudisreasonablycertaintoresultinsubstantialinjurytotheorganization,

thenthelawyermayrevealinformationrelatingtotherepresentationwhetherornotRule1.6permitssuchdisclosure,butonlyifandtotheextentthelawyerreasonablybelievesnecessarytopreventsubstantialinjurytotheorganization.

Up

Out

TerminatingRepresentation– Rule4-1.16(a) ExceptasstatedinRule4-1.16(c),alawyershallnotrepresenta

clientor,whererepresentationhascommenced,shallwithdrawfromtherepresentationofaclientif:(1) therepresentationwillresultinviolationoftherulesofprofessional

conductorotherlaw;(2) thelawyer'sphysicalormentalconditionmateriallyimpairsthe

lawyer'sabilitytorepresenttheclient;or(3) thelawyerisdischarged.

(b) ExceptasstatedinRule4-1.16(c),alawyermaywithdrawfromrepresentingaclientif:(1) withdrawalcanbeaccomplishedwithoutmaterialadverseeffecton

theinterestsoftheclient;...(7)othergoodcauseforwithdrawalexists.

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Client-RelatedInformation

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Scenario11

• LawyerrepresentsClientincase• OpponentseeksdiscoveryofLawyer'sbills

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Confidentiality

Rule4-1.6(a)Alawyershallnotrevealinformationrelatingtotherepresentationofaclient unlesstheclientgivesinformedconsent,thedisclosureisimpliedlyauthorizedinordertocarryouttherepresentationorthedisclosureispermittedbyparagraph(b).

"Informationrelatingtotherepresentationofaclient..." Rule4-1.6

Client

Court Filings

Real Estate Records

Newspaper

Depositions

Pleadings

Opposing Party

Lawyer

Attorney-ClientPrivilege

Client Lawyer

Renditionof

LegalServices

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Scenario12

• LawyerrepresentsbusinesspartnersAandBincase

• AseeksdiscoveryofLawyer'sbillswhileinlitigationwithBor

• OpponentseeksdiscoveryofLawyer'sbillswhileinlitigationwithAandB

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JointRepresentation

Client1 Client2

Lawyer

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DeBoldv.Case (8th Cir.BAP2005)

"Whentwoormorepersons,eachhavinganinterestinsomeproblem,jointlyconsultanattorney,theirconfidentialcommunicationswiththeattorney,thoughknowntoeachother,willofcoursebeprivilegedinacontroversyofeitherorbothoftheclientswiththeoutsideworld,thatis,withpartiesclaimingadverselytobothoreitherofthosewithintheoriginalcharmedcircle."

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CandortoaTribunal

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Scenario13

• LawyerrepresentsClientinfilingforbankruptcy

• Client'sschedulescontainmisstatements

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MissouriRule4-3.3(a) Alawyershallnotknowingly:

(1) makeafalsestatementoffactorlawtoatribunalorfailtocorrectafalsestatementofmaterialfactorlawpreviouslymadetothetribunalbythelawyer;

(2) failtodisclosetothetribunallegalauthorityinthecontrollingjurisdictionknowntothelawyertobedirectlyadversetothepositionoftheclientandnotdisclosedbyopposingcounsel;or

(3) offerevidencethatthelawyerknowstobefalse.Ifalawyer,thelawyer'sclient,orawitnesscalledbythelawyerhasofferedmaterialevidenceandthelawyercomestoknowofitsfalsity,thelawyershalltakereasonableremedialmeasures,including,ifnecessary,disclosuretothetribunal.Alawyermayrefusetoofferevidence,otherthanthetestimonyofadefendantinacriminalmatter,thatthelawyerreasonablybelievesisfalse.

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Rule4-3.3(b)and(c)(b) Alawyerwhorepresentsaclientinanadjudicative

proceedingandwhoknowsthatapersonintendstoengage,isengaging,orhasengagedincriminalorfraudulentconductrelatedtotheproceedingshalltakereasonableremedialmeasures,including,ifnecessary,disclosuretothetribunal.

(c) ThedutiesstatedinRule4-3.3(a)and(b)continuetotheconclusionoftheproceeding andapplyevenifcompliancerequiresdisclosureofinformationotherwiseprotectedbyRule4-1.6.

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ConcealmentofAssets– 18USC§ 152Apersonwho--(1)knowinglyandfraudulentlyconceals...anypropertybelongingtotheestateofadebtor;(2)knowinglyandfraudulentlymakesafalseoathoraccountinorinrelationtoanycaseundertitle11;(3)knowinglyandfraudulentlymakesafalsedeclaration,certificate,verification,orstatementunderpenaltyofperjuryaspermittedundersection1746oftitle28,inorinrelationtoanycaseundertitle11;(4)knowinglyandfraudulentlypresentsanyfalseclaimforproofagainsttheestateofadebtor,orusesanysuchclaiminanycaseundertitle11,inapersonalcapacityorasorthroughanagent,proxy,orattorney;(5)knowinglyandfraudulentlyreceivesanymaterialamountofpropertyfromadebtorafterthefilingofacaseundertitle11,withintenttodefeattheprovisionsoftitle11;...(9)afterthefilingofacaseundertitle11,knowinglyandfraudulentlywithholdsfromacustodian,trustee,marshal,orotherofficerofthecourtoraUnitedStatesTrusteeentitledtoitspossession,anyrecordedinformation(includingbooks,documents,records,andpapers)relatingtothepropertyorfinancialaffairsofadebtor,shallbefinedunderthistitle,imprisonednotmorethan5years,orboth

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BankruptcyFraud– § 18USC157Apersonwho,havingdevisedorintendingtodeviseaschemeorartificetodefraudandforthepurposeofexecutingorconcealingsuchaschemeorartificeorattemptingtodoso-

(1) filesapetitionundertitle11,includingafraudulentinvoluntarypetitionundersection303ofsuchtitle;

(2) filesadocumentinaproceedingundertitle11;or

(3) makesafalseorfraudulentrepresentation,claim,orpromiseconcerningorinrelationtoaproceedingundertitle11,atanytimebeforeorafterthefilingofthepetition,orinrelationtoaproceedingfalselyassertedtobependingundersuchtitle,

shallbefinedunderthistitle,imprisonednotmorethan5years,orboth.

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KeepingClientInformed– Rule4-1.4(a)

Alawyershall:(1) keeptheclientreasonablyinformedaboutthe

statusofthematter;(2) promptlycomplywithreasonablerequestsfor

information;and(3) consultwiththeclientaboutanyrelevantlimitation

onthelawyer'sconductwhenthelawyerknowstheclientexpectsassistancenotpermittedbytheRulesofProfessionalConductorotherlaw.

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AssistingCriminalConduct– Rule4-1.2(f)

Alawyershallnotcounselaclienttoengage,orassistaclient,inconductthatthelawyerknowsiscriminalorfraudulent,butalawyermaydiscussthelegalconsequencesofanyproposedcourseofconductwithaclientandmaycounselorassistaclienttomakeagoodfaithefforttodeterminethevalidity,scope,meaningorapplicationofthelaw.

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HowDoYouCommunicateWithThirdParties?

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Scenario14

• LawyercontactsDebtortonegotiatepossiblesettlement

• WhatarethelimitsonLawyer'scommunications?

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Candor– MissouriRule4-4.1

Inthecourseofrepresentingaclientalawyershallnotknowingly:(a) makeafalsestatementofmaterialfactorlaw

toathirdperson;or(b) failtodiscloseamaterialfactwhendisclosure

isnecessarytoavoidassistingacriminalorfraudulentactbyaclient,unlessdisclosureisprohibitedbyRule4-1.6.

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UnrepresentedPersons– Rule4-4.3

• Indealingonbehalfofaclientwithapersonwhoisnotrepresentedbycounsel,alawyershallnotstateorimplythatthelawyerisdisinterested.

• Whenthelawyerknowsorreasonablyshouldknowthattheunrepresentedpersonmisunderstandsthelawyer'sroleinthematter,thelawyershallmakereasonableeffortstocorrectthemisunderstanding.

• Thelawyershallnotgivelegaladvicetoanunrepresentedperson,otherthantheadvicetosecurecounsel,ifthelawyerknowsorreasonablyshouldknowthattheinterestsofsuchapersonareorhaveareasonablepossibilityofbeinginconflictwiththeinterestsoftheclient.

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RespectingtheRightsofThirdPersons:MissouriRule4-4.4

(a) Inrepresentingaclient,alawyershallnotusemeansthathavenosubstantialpurposeotherthantoembarrass,delay,orburdenathirdperson,orusemethodsofobtainingevidencethatviolatethelegalrightsofsuchaperson.

(b) Alawyerwhoreceivesadocumentorelectronicallystoredinformationrelatingtotherepresentationofthelawyer'sclientandknowsorreasonablyshouldknowthatthedocumentorelectronicallystoredinformationwasinadvertentlysentshallpromptlynotifythesender.

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Scenario15

• LawyercontactsDebtortonegotiatepossiblesettlement

• DebtortellsLawyerthatDebtorhashiredcounsel

• WhatarethelimitsonLawyer'scommunications?

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Anti-ContactRule:MissouriRule4-4.2

Inrepresentingaclient,alawyershallnotcommunicateaboutthesubjectoftherepresentationwithapersonthelawyerknowstoberepresentedbyanotherlawyerinthematter,unlessthelawyerhastheconsentoftheotherlawyerorisauthorizedtodosobylaworacourtorder.

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Anti-ContactRule– Rule4-4.2• Inrepresentingaclient,• alawyershallnotcommunicateaboutthesubjectoftherepresentation

• withapersonthelawyerknowstoberepresentedbyanotherlawyerinthematter,

• unlessthelawyerhastheconsentoftheotherlawyer orisauthorizedtodosobylaworacourtorder.

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LawyerAsWitness

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Scenario16

• Creditorfilesclaimlate• CreditorassertsLawyertriedtofiletheclaimtimely,butcouldnot

• Lawyerisexpectedtotestifyaboutlatefiling• DebtorseekstodisqualifyLawyer

Goldenv.Gibrick (N.D.Bankr.January2017)

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MissouriRule4-3.7(a) Alawyershallnotactasadvocateatatrialinwhich

thelawyerislikelytobeanecessarywitnessunless:(1) thetestimonyrelatestoanuncontestedissue;(2) thetestimonyrelatestothenatureandvalueoflegal

servicesrenderedinthecase;or(3) disqualificationofthelawyerwouldworksubstantial

hardshipontheclient.(b) Alawyermayactasadvocateinatrialinwhich

anotherlawyerinthelawyer'sfirmislikelytobecalledasawitnessunlessprecludedfromdoingsobyRule4-1.7orRule4-1.9.

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MichaelDowneyDowneyLawGroupLLC

(314)961-6644(844)961-6644tollfree

mdowney@DowneyLawGroup.com

ThankYou