Can a lawyer help an insolvent client pay some creditors over others, and must the lawyer disclose the client's past fraud or failure to file tax returns?

Plain-English summary

A lawyer asked about his duties to a client who may have defrauded certain creditors and had failed to file income tax returns for several years, focusing on assisting the client in applying assets toward major general creditors. The opinion grounded its analysis in two rules of the former Code: Rule 7-102, which barred a lawyer from concealing what the law requires the lawyer to reveal or from assisting conduct the lawyer knew to be illegal or fraudulent, and Rule 4-101, which protected client confidences and secrets while permitting a lawyer to reveal a client's intention to commit a crime and information necessary to prevent it.

The opinion concluded that, if the client was not in bankruptcy, the lawyer could ethically assist the client in negotiating the manner and amounts of payments to general creditors, with limitations; the fact that bankruptcy law might assign different priorities (such as priority for tax debts) did not change that result, though those rules would apply if the client later filed. On the possible fraud against creditors, the opinion concluded the lawyer could do nothing that revealed the possible fraud (a privileged communication) but that, so long as the lawyer did nothing to assist the client in perpetuating a fraud, assisting in payment was not unethical even if it lessened the likelihood of discovery.

On the tax issues, the opinion concluded the lawyer should counsel the client about the penalties for failing to report income and file returns and advise the client to file for past and present years, but that assisting in payment was not illegal or fraudulent except to the extent the lawyer knew it would render the client incapable of meeting tax obligations. On disclosure, the opinion concluded that past failures to report and file were protected by Rule 4-101 and could not be revealed without the client's consent; as to future misconduct, although Rule 4-101 permitted revelation, the Committee, weighing the importance of confidentiality and noting the ABA's then-new Model Rule 1.6 (limiting permissive disclosure to preventing imminent death or substantial bodily harm), concluded the lawyer had no duty to disclose the client's intended future tax nonpayment and could not assist it.

Currency note

This opinion was issued in 1984, when New Mexico lawyers were governed by the former New Mexico Code of Professional Responsibility, which the State Bar later replaced with the Rules of Professional Conduct; it also predates the State Bar of New Mexico's November 3, 2008 revisions to those Rules (the New Mexico adoption of the ABA Ethics 2000 changes). The Disciplinary Rules it cites are no longer in force, and the confidentiality exceptions have since changed. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a lawyer help an insolvent client pay some creditors and not others?

A: The opinion concluded that, outside bankruptcy, a lawyer could ethically help the client negotiate the manner and amounts of payments to general creditors, with limitations, and that bankruptcy-law priorities did not change that unless the client filed for bankruptcy.

Q: Could the lawyer reveal that the client may have defrauded creditors?

A: No. The opinion concluded that the possible fraud was a privileged communication the lawyer could not reveal, though the lawyer also could not assist the client in perpetuating a fraud.

Q: Did the lawyer have to disclose the client's failure to file tax returns?

A: No. The opinion concluded that past failures to report income and file returns were protected by Rule 4-101 and could not be revealed without consent, and that even as to intended future nonpayment the lawyer had no duty to disclose, though the lawyer could not assist it.

Q: What did the opinion say the lawyer should do about the taxes?

A: The opinion concluded the lawyer should counsel the client about the penalties for failing to report and file, and advise the client to report and file for both past and present years.

Background and rules framework

The opinion interpreted Rule 7-102 (representing a client within the bounds of law; not assisting illegal or fraudulent conduct) and Rule 4-101 (preservation of confidences and secrets) of the former New Mexico Code of Professional Responsibility, and looked to the ABA Model Rules of Professional Conduct adopted in August 1983, specifically Model Rule 1.6, for guidance on permissive disclosure.

Citations and references

Rules of Professional Conduct (former Code):

• Model Code DR 7-102(A) / NM Code Rule 7-102 (bounds of the law; assisting illegal or fraudulent conduct)
• Model Code DR 4-101 / NM Code Rule 4-101 (confidences and secrets; permissive disclosure)

Other opinions and authorities cited:

• ABA Model Rules of Professional Conduct, Rule 1.6 (adopted August 2, 1983).

See also

• NM Ethics Op. 2005-2: Reporting an Unreasonable Fee
• NM Ethics Op. 1983-5: Representation Adverse to a Current or Former Client

Source

• Landing page: https://www.sbnm.org/Leadership/Committees/Ethics-Advisory-Committee/Ethics-Advisory-Opinions
• Original PDF: https://www.sbnm.org/Portals/NMBAR/AboutUs/committees/Ethics/1984/1984-2.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion 1984-2
The question presented to the Advisory Opinion Committee in this instance is the duty of an attorney with regard to a client who may have defrauded certain creditors and who has failed to file income tax returns for several years. Specifically, the attorney is concerned about his role in assisting his client in applying assets towards the accounts of the client's major general creditors and how this relates to the client's failure to pay income tax.
Initially, reference should be made to two rules in the New Mexico Code of Professional Responsibility. Rule 7-102 provides in part:
(A) In his representation of a client, a lawyer shall not:

(3) conceal or knowingly fail to disclose that which he is required by law to reveal;

(7) counsel or assist his client in conduct that the lawyer knows to be illegal or fraudulent;
Rule 4-101 governs the confidential information protected by the attorney-client privilege. It states:
(B) Except when permitted under Rule 4-101(C), a lawyer shall not knowingly:
(1) reveal a confidence or secret of his client;

(C) A lawyer may reveal:

(3) the intention of his client to commit a crime and the information necessary to prevent the crime;
The attorney has asked whether he may ethically assist his client to pay general creditors during a period of insolvency, even though if the client were in bankruptcy, the tax debts would have priority. The attorney also questions whether in negotiations with the general creditors, some may be paid in such a manner that they are preferred over others. The Committee feels that, if the client is not in bankruptcy proceedings, the lawyer may ethically assist his client to negotiate the manner and amounts of payments to be made to his general creditors with some limitations, as noted infra. The fact that certain priorities might exist under bankruptcy law does not alter this result. Should the client file for bankruptcy, then certainly those rules would apply, including as they relate to any payments made within a given amount of time prior to filing.
The attorney has also expressed concern with regard to the fact that his client may have defrauded some of his creditors. Specifically, the attorney has inquired as to whether he may assist his client in paying some amount towards the total debt owed, when this may have the effect of lessening the likelihood of an investigation of his client. Initially, the Committee notes that the attorney can do nothing which in any way reveals the possibility that his client may have committed a fraud upon his creditors. That is a privileged communication of the client. As long as the attorney does nothing to assist his client in perpetuating a fraud, the Committee does not find the proposed assistance in payment unethical. The fact that this may lessen the likelihood of discovery is not, in the opinion of the Committee, illegal or fraudulent.
Finally, the attorney has made two additional inquiries concerning the income tax liability. First, he is concerned about whether he may ethically assist his client in making payments towards the general creditors, when this will impair the client's ability to meet current and past tax obligations. The attorney should, of course, counsel his client concerning the penalties for failure to report income and file income tax returns. In addition, the client should be advised to report and file, for both past and present. However, the assistance in payment is not illegal or fraudulent except to the extent that the attorney knows that the actions will render his client incapable of meeting tax obligations.
The question concerning the revelation of his client's criminal conduct is somewhat more troublesome. As to any past failure to report income and file returns, the attorney cannot reveal that information without the consent of his client. That constitutes past conduct which is protected by the attorney-client privilege, pursuant to Rule 4-101. As to future misconduct, Rule 4-101 provides that a lawyer may reveal that information. However, the Rule does not give the attorney any guidance in when revelation would be appropriate. The Committee notes that the American Bar Association model Rules of Professional Conduct, adopted by the House of Delegates on August 2, 1983, provide the following more specific guidelines:
Rule 1.6: (b) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary:
(1) to prevent the client from committing a criminal act that the lawyer believes is likely to result in imminent death or substantial bodily harm;
The confidentiality of client communications is one of the most important and firmly established principles in law. As noted in the comment to the above rule:
A fundamental principle in the client-lawyer relationship is that the lawyer maintain confidentiality of information relating to the representation. The client is thereby encouraged to communicate fully and frankly with the lawyer even as to embarrassing or legally damaging subject matter.
Based upon the foregoing and the nature of the crime involved, the Committee does not feel that the attorney has a duty to disclose his client's intention concerning future tax liability. Certainly, the attorney cannot participate or assist his client in that regard. However, when weighing the importance of confidentiality with a failure to report income or pay income taxes, it is the Committee's opinion that the confidences of the client should be preserved in this instance.