Summary of a Recent
Judicial Development in
Bankruptcy

Attorneys Allegedly Aided and Abetted Clients in Bankruptcy Fraud

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Eggmann v. Myers, No. 08-cv-757-JPG, 2009 WL 1098677 (S.D. Ill. Apr. 23, 2009), the United States District Court for the Southern District of Illinois held that bankruptcy attorneys could be held liable for breach of their professional duties owed to their clients' estates, and that they could also be held criminally responsible for aiding and abetting their clients in bankruptcy fraud.

Background

Chapter 12 debtors, with the help of their attorneys, attempted to conceal and convert assets in order to conceal the fact that their Chapter 12 case was improper. Id. at *1. Chapter 12 bankruptcy is reserved for family farmers, meaning "an individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000," but the debtors in this case had aggregate debts of almost $5 million, and as debtors-in-possession they were supposed to be disinterested. Id. Their attorneys applied for and received attorney's fees from the estate for work they had not actually done. Id. The case was subsequently converted to Chapter 11, and the debtors and their attorneys continued to conceal the fact that the case was improper in order to gain time and conceal and convert assets. Id. at *2. The case was ultimately converted to Chapter 7, by which time the estate's assets had been substantially depleted. Id. The court then appointed a trustee, who brought this action alleging that the debtors' attorneys conspired to commit bankruptcy fraud, committed and aided and abetted the commission of bankruptcy fraud, and breached their professional duties to the estate. Id. The attorneys moved to dismiss. Id.

Arguments

The attorneys argued that they only owed a duty to their clients and not to the estate, and that "as a matter of law, an attorney cannot conspire with nor aid and abet his client." Id. They also argued that the plaintiff's complaint was inadequate as a matter of law because it failed to explain how the damages sought were calculated. Id. at *2-3.

Analysis and Holdings

The court found that the plaintiff's complaint was sufficiently specific under Rule 9 of the Federal Rules of Civil Procedure, noting that the rule does not require a plaintiff to explain how he calculated damages. Id. at *3. The court further stated that "it is well established that an attorney can be held criminally responsible for aiding and abetting a client in committing bankruptcy fraud." Id. Lastly, the court held that because the attorneys represented the debtors as debtors-in-possession and were paid from estate funds, they owed a professional duty to the estate and not just the debtors. Id. at *4. Therefore, the court denied the defendants' motion to dismiss. Id.

The case was decided on April 23, 2009.