McNally v. Rey, 275 Va. 475, 659 S.E.2d 279 (2008)

Brief Summary
Attorney has no duty during litigation to disclose client’s intent to file for bankruptcy.

Complete Summary
Defendant-attorney McNally was counsel to Simonz Inc. (“Simonz”) in the underlying litigation brought by plaintiff Rey. McNally helped Simonz file for bankruptcy the day before the trial with Rey was scheduled to begin. Upon learning of the bankruptcy, Rey immediately sought attorney’s fees from McNally. McNally filed a letter with the court requesting an opportunity to respond to Rey’s motion and asserting that it would have been an ethical violation for McNally to disclose his client’s intent to file bankruptcy. Without a hearing, the circuit court sanctioned McNally for unnecessarily increasing the cost of litigation.

The appellate court reversed the judgment because the circuit court’s application of the law was an abuse of discretion. The appellate court addressed two potentially sanctionable acts.

First, the court addressed McNally’s filing of a witness and exhibit list when he allegedly knew the case would not proceed to trial. The court initially had to infer that the circuit court had applied Virginia Code § 8.01-271.1 (the state analog to Fed. R. Civ. P. 11). The court then noted that §8.01-271.1 requires documents signed by an attorney and filed with the court to be well grounded in fact and based on a good faith legal argument. The court held that there was nothing in the record to indicate that McNally’s filing, which was required by the circuit court’s pretrial order, was not well grounded in fact or made in bad faith. For example, there was nothing in the record to show: that McNally did not intend to try the case when he filed the witness and exhibit list; that he filed those documents for frivolous or vexatious purposes; or that the documents themselves were somehow defective.

Second, the court addressed the fact that McNally did not directly disclose to opposing counsel his client’s intent to file for bankruptcy. The court noted that there was nothing improper about the bankruptcy filing itself. The court then held that requiring an attorney to disclose his client’s intent to file for bankruptcy could have a chilling effect on the client’s ability to avail itself of rights granted by the bankruptcy code.

Significance of Opinion
The court’s holding supports client choice and client rights of confidentiality but should not be read to condone true misrepresentation.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.

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