THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

to serve the DIP as a matter of discretion based on the needs of the case, but those cases did not withstand appellate security.¹⁸⁶

10. Prepetition receipt of fees subject to avoidance as a preference creates a disqualifying conflict of interest.¹⁸⁷ A firm may be held not disinterested if fees paid to an individual member as a receiver or trustee in fact belong to the firm.¹⁸⁸

E. DIP's Counsel's Representation of the Estate's Creditors.

1. A professional is not disqualified as DIP counsel solely because of employment by a creditor under the Bankruptcy Code, absent objection by another creditor or the U. S. Trustee, whereupon the court is to disapprove the employment if an actual conflict of interest exists.¹⁸⁹ That section of the Bankruptcy Code was amended in 1984. Prior to the amendment, it stated that the professional could not, while representing the trustee [or DIP] represent a creditor in connection with the case. The option to represent both now appears open in the absence of an actual conflict, e.g. in the case of an anticipated plan paying creditors in full, a fully secured creditor with collateral the debtor plans to give up, or an insider creditor willing to accept subordinated treatment.¹⁹⁰ Representation of a debtor while or even after representing the creditors committee in a predecessor case has been held to present a more than remote likelihood of an actual conflict, warranting disqualification; however, the district court allowed limited representation under § 327(e).¹⁹¹ If a former client creditor objects and the matters are substantially related, the bankruptcy court may enforce ethical code prohibitions on representation.¹⁹² Creditors' counsel often has been allowed to represent the estate as special counsel to pursue matters where the estate and creditor have a common interest.¹⁹³
2. Even under the present, more liberal version of Section 327(c), courts have not allowed counsel to actively represent a creditor in the same bankruptcy case in which the trustee or DIP is represented, at least without full disclosure and an opportunity to object.¹⁹⁴ And even where DIP counsel is not representing the creditor in connection with the bankruptcy case, allegiance to a creditor client may be considered to preclude counsel from investigating preferences, fraudulent conveyances, and so forth adequately, and to inhibit effective negotiation of a reorganization plan.¹⁹⁵
3. Model Rule of Professional Conduct 1.7 provides that a lawyer shall not represent a client if the representation will be directly adverse to another client or materially limited by the lawyer's responsibilities to another client unless (1) the lawyer reasonably believes the representation will not adversely affect the relationship and (2) each client consents after consultation, which shall include an explanation of the implications of common representation and