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2006 NORTON BANKRUPTCY LAW SEMINAR MATERIALS

THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

By Susan M. Freeman

*This outline is adapted from Chapter 27, Ethical Responsibilities,
Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)

 

duties.114 As stated in the comment to Model Rule of Professional Conduct 1.6, "The lawyer is part of a judicial system charged with upholding the law. One of the lawyer's functions is to advise clients so that they avoid any violation of the law in the proper exercise of their rights."115

  1. If the operating head of the DIP entity fails to act in compliance with the DIP's fiduciary responsibilities, the lawyer may have to refer the matter higher up the chain of command to the chief executive officer or board of directors.116 The lawyer is to consider the seriousness of any illegality and its consequences in deciding what to do within the organization, however, and is to minimize any disruption to the entity and the risk of revealing information to outsiders.117 If a lawyer "develops material doubts about whether a proposed course of action in fact serves the estate's interests, he must seek to persuade his client to take a different course or, failing that, resign."118 DIP counsel may in some cases be obligated to bring the DIP's breaches of fiduciary duty to the attention of the court.119
  2. Thus, counsel is to urge the DIP to meet its fiduciary duties to creditors, but is to abide by the client's decisions as long as there is a nonfrivolous basis for doing so.120 If the

attorney and client disagree, it is not the attorney's prerogative to act on her own as she believes best for the estate, but rather to refrain from filing bad faith or frivolous pleadings, and to withdraw if the high standards for withdrawal are met.121 If the attorney fails to appropriately

counsel the client and carries out an abusive client strategy, her fees may well be subject to attack‹refunds of previously allowed interim payments have been mandated where the court has found unethical conduct.122

    1. A thorough analysis of the legal theories underpinning ‹ and delimiting ‹ the fiduciary duties of DIP counsel is found in Hansen, Jones & Leta, P.C. v. Segal.123 The court explains that DIP counsel's client is the DIP, not the "estate," and identifies the duties counsel owes to the DIP and to the court. The court further explains why DIP counsel does not owe duties to the DIP client's beneficiaries, the equity holders and creditors who have conflicting interests. The court holds that estate interests are protected when the court focuses on whether DIP counsel breached counsel's fiduciary duty to the client DIP, violated Code obligations or
    2. failed to provide services that benefit the estate (instead of insiders). The rights and powers vested in creditors and other parties in interest provide further protection.
  1. Other courts have followed Hansen, Jones & Leta, further elaborating on DIP and DIP counsel fiduciary duties.124

III. Qualification to Serve as DIP Counsel.

A. Disinterestedness and Lack of Any Adverse Interest.

1. Bankruptcy Code § 327(a) requires that counsel for the trustee not "hold or represent an interest adverse to the estate" and be a "disinterested person." Courts have held that § 1107 imposes the same requirement on counsel for the DIP.125 "Disinterestedness" by definition includes a checklist of attributes for the applicant counsel, such as not being itself a creditor or equity security holder.126 It also requires that the applicant not personally hold an interest "materially adverse" to the estate or any class of creditors or equity holders.127 To that extent only it overlaps the § 327(a) requirement that the applicant not "hold" or "represent" an adverse interest. Adverse interest has been defined broadly to mean either (i) possessing or

 

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