THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

Several bankruptcy courts, however, have concluded that all potential conflicts are actual conflicts.¹⁴¹

4. A lawyer retained by an entity owes allegiance to the entity, and not its shareholders or partners.¹⁴² Counsel is not to be influenced by the personal desires of people related to the entity--sometimes a very difficult task.¹⁴³ Majority stockholders, for example, are frequently not only officers and directors, but also guarantors of a closely held corporation's debts. Positions taken by the DIP can adversely affect a guarantor controlling owner, while a contrary position could be less helpful to the corporation as a whole.¹⁴⁴ The same problems occur with debtor partnerships, where a general partner is liable even without a guarantee.¹⁴⁵ Partnership bankruptcies are likely to generate conflicts when partners, previously represented jointly, disagree on the need for filing.¹⁴⁶

5. Courts have differed in their approach to DIP counsel disqualification in affiliated entity cases. Some courts are strictly construing disinterestedness requirements of Bankruptcy Code sections 327, 328(c), and 1107(b), and disqualifying counsel based on the potential for conflicts and appearance that dual loyalty may exist.¹⁴⁷ Others have disqualified counsel from representing related entities on evidence of actual adverse interests among them.¹⁴⁸ Some courts have required such evidence of actual adversity before disqualifying joint counsel,