April 15 2011
On February 13 2009 the Tokyo District Court ruled that a lawyer who represents a debtor in the latter's petition for bankruptcy and has notified such representation to the creditors must not only file the petition as soon as possible, but also take necessary measures to prevent the dispersal or loss of the debtor's assets before the trustee assumes control. In this case the court found that the lawyer had not filed a petition for bankruptcy in the two years since agreeing to represent the client, and that the bankruptcy assets had diminished substantially during that time. As a result, the lawyer was liable in tort for damages to the bankruptcy estate.
In November 2005 an insolvent company began to consult with a lawyer. In December 2005 the company formally entrusted the lawyer to file a petition for bankruptcy and discontinued the company's business operations. The company's representative notified the creditors that the company had entrusted the lawyer with the insolvency proceedings and asked the creditors not to seek individual collection from the company. However, the lawyer did not keep the company's books or corporate seals and did not take certain measures - which would have been possible - with respect to the company's bank account.
In December 2007 the lawyer filed a petition for bankruptcy on behalf of the company. In January 2008 the court ruled on the commencement of bankruptcy and appointed a bankruptcy trustee. The trustee reviewed the company's assets and found that they had diminished substantially. The trustee sued the lawyer, seeking compensation for the damage caused by the lawyer's negligent failure to maintain the debtor's assets. However, the defendant argued that a lawyer who represents a debtor has no power to maintain the debtor's assets before a commencement order is issued by the bankruptcy court.
The Tokyo District Court found in favour of the trustee, and held as follows:
"Bankruptcy proceedings are proceedings to make equal distribution of the debtor's assets in accordance with the order provided by the bankruptcy laws, enjoining creditors from individual claims and execution. For this purpose, before and after the commencement, without distinction, the debtor is required to maintain its assets on behalf of the creditors and is prohibited from actions that are harmful to the equal treatment of creditors, including partial payments. Therefore, a lawyer with whom the debtor entrusts [the responsibility of] filing a petition for bankruptcy must advise the debtor to carry out the obligations required under the bankruptcy laws, and the lawyer must carry out the obligations on behalf of the debtor and reduce the burden imposed on the debtor at an earlier stage. The lawyer... must carry out the public obligations to realise the purpose of the bankruptcy procedure, and is obliged to maintain the debtor's assets, file a petition for bankruptcy as expeditiously as possible and take measures to prevent the debtor's asset from being scattered and lost before the trustee takes over the assets.
Although these obligations are not stated in the Bankruptcy Code, they are not merely moral obligations, but are legal obligations which naturally follow from the purpose of the bankruptcy laws. If the lawyer representing the debtor in filing a petition for bankruptcy has diminished or lost the assets which would otherwise constitute the bankruptcy estate for the creditors, and has not carried out [the relevant] obligations, whether intentionally or negligently, [he or she] is liable in tort to the trustee to compensate the amount which was diminished or lost. In this case... the defendant excessively violated the obligations of a lawyer who represents a debtor, and caused damage to the bankruptcy estate. Thus, the lawyer must pay compensation for damage, unless there were facts which could justify the expenditure... by the debtor."
ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.