THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

asserting any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate would be a rival claimant, or (ii) possessing or having a predisposition under the circumstances to be biased against the estate.¹²⁸ A number of courts have also used a disinterestedness test of whether the person "in the slightest degree might have some interest or relationship that would even faintly color the independence and impartial attitude required by the Code and the Bankruptcy Rules," but that test was rejected by the Third Circuit as a discredited "appearance of impropriety" standard.¹²⁹

2. The circuit courts tend to read the statutory requirements literally, when the disqualifying attribute is specifically set forth in the Code, such as being a creditor or insider.¹³⁰ These cases have not dealt with facts that are difficult to justify, however, such as a law firm associate owning a few equity shares in a publicly traded debtor. When the Code does not explicitly mandate disqualification, most circuit court cases have evaluated the facts of the case from an abuse of discretion perspective, focusing on materiality of the arguably-disqualifying facts, and weighing potential difficulties against potential advantages to the estate.¹³¹ Counsel

must present evidence of the likelihood the potential conflict might turn into an actual one, and the influence this conflict is likely to have on decisionmaking, i.e. the likelihood of material adversity.

3. Under Code § 327(e), special counsel need not be disinterested, and must lack a material adverse interest only with respect to the matter on which the attorney is to be employed. ¹³² An application to employ special counsel must include sufficiently detailed disclosures to enable the court to determine whether there is such a disqualifying adverse interest.¹³³ Attorneys cannot purport to serve as special counsel to bypass disitnerestedness requirements while in fact acting as bankruptcy counsel;¹³⁴ they may perform specific general bankruptcy counsel duties, however.¹³⁵ If special counsel has a conflict arising from representation of a creditor rather than prior representation of the debtor (as referenced in Section 327(e)), courts are divided on whether the attorney will be disqualified, with most cases authorizing such representation under § 327(a) and (c) and by analogy, (e).¹³⁶

B. Representation of Multiple, Affiliated Entities.

1. Courts generally focus on the insider's/ affiliate's status as a creditor as a key reason for disqualifying his DIP counsel as the affiliated entity's DIP counsel. But representation of a creditor is not a disqualifying "adverse interest" unless there is "an actual conflict of interest."¹³⁷ The difference between actual and potential conflicts is discussed in the attorney ethics rules and codes, and by bankruptcy courts in the context of joint representation of affiliated DIPs.
2. Professional conduct rules prohibit representation of one client directly adverse to another client or materially limited by counsel's responsibilities to another client or third person or his own interests, unless a waiver is obtained. If the lawyer reasonably believes the representation will not be adversely affected, and the clients consent after consultation, multiple representation can go forward.¹³⁸ The clients who are to waive the conflict would be the related DIP entities. However, the court may determine as a disinterested party that the client should not agree to the representation under the circumstances.¹³⁹

3. Attorney ethics rules do not require disqualification for potential conflicts.¹⁴⁰