Wednesday, February 17, 2010

A paradox in bankruptcy law

And now for something completely different: a possible legal paradox.

(The further thoughts I promised on the SCAT hypothesis are coming soon.)

Consider the following situation:

A debtor walks into a lawyer's office and declares that he's bankrupt. The lawyer advises him that a declaration of bankruptcy might be more legally effective if done in a formal legal proceeding. The debtor says okay, and asks the lawyer to represent him in such as proceeding. She agrees. The debtor and the lawyer sign a contract where the lawyer agrees to represent the debtor for a flat fee of $2000, payable in quarterly installments of $500, with the entire agreement being subject to the court's agreeing to appoint the lawyer as the debtor's representative – a necessary procedure under bankruptcy law.

The lawyer petitions the bankruptcy court to be appointed as the debtor's representative. The court reasons as follows:

If we appoint the lawyer, she becomes a creditor of the debtor she's representing.
If she's a creditor, she has a potential conflict of interest, since her duties to the client include trying to discharge as many of his debts as possible.
Since a lawyer cannot be in such a potential conflict of interests with her client, we cannot permit the appointment.

But by not appointing her, the court prevents the conflict of interest from arising. And in the absence of a potential conflict of interest, there is no reason not to appoint the lawyer, and the court ought to appoint her.

And repeat.

Of course, the court has the discretion to disqualify the lawyer for any other good reason, including that representation would give rise to a paradox. But this gives rise to the same problem: if the court doesn't appoint her, it does not give rise to a paradox, meaning the court should appoint her.

This may fall short of a genuine paradox, since the lawyer probably does not have an actual right to be appointed, subject only to a good reason not to appoint her. The court would certainly be right to disqualify her. I just don't know why.


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Nicole N said...

Except there is always a carve out for lawyers fees...

Otherwise, lawyers would always be in conflict of interest with their clients.

Uri said...


The book I was using to study bankruptcy law (the Examples and Explanations study guide) seemed to suggest that there was no carve-out for lawyers' fees. Or at least that it was not universal.

Mark said...

It's not a carve out, it's cash in advance. The much-sought-after Evergreen fund. And it's not a fraudulent transfer if it's for actual services so... there ya go. Make clients pay you before bankruptcy, or you'll wipe yourself out.

Donna said...

I agree with Mark and emphasize that
i believe the payment plan is more the problem.

Mr. Ninja-face said...

I don't quite understand the other side of the coin wherein the court decides against appointing the lawyer. You write: " not appointing her, the court prevents the conflict of interest from arising. And in the absence of a potential conflict of interest..." I don't see how prevention of conflict of interest has anything to do with the potential for it. There could still be the potential for the conflict of interest even after the prevention of it. I think here 'potentiality' is being subsumed under a particular instantiation, even though the prevention of that instantiation does not relieve it from the possibility of it occurring at some other point in the future.

Uri said...

Well, yes, there could be a different conflict of interest. But by not appointing the lawyer, the court avoids a certain conflict of interest.

Dave said...

It looks like Mr. Ninja-face hit it head-on. If appointing a lawyer to do a thing would create a conflict of interest, then refusing to appoint the lawyer doesn't somehow undo that.

If this case is a paradox, then so too is any case in which a court refuses to appoint a lawyer on the grounds of potential conflict of interest.

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