THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

1. The 2005 Bankruptcy Code amendments include specific remedies that may be imposed if the debtor's lawyer violates Bankruptcy Rule 9011 and the case is dismissed or converted under Bankruptcy Code § 707(b).⁹ The amendments authorize civil penalties for any Rule 9011 violation.¹⁰ The amendments further incorporate into the Bankruptcy Code a variation on Bankruptcy Rule 9011 that is harsher than the current rule, and applies to every attorney's signature on a petition, pleading or written motion.¹¹ Among other things, the new Code language requires that all factual contentions be "well grounded" instead of having "evidentiary support," and that all legal arguments be made in "good faith," instead of being "nonfrivolous."¹² Bankruptcy Rule 9011 may also be amended to expressly extend its reach to all documents, including schedules, submitted to the court or a trustee, even if the documents, including schedules, submitted to the court or a trustee, even if the lawyer does not sign them, to comply with the "sense of Congress" in the 2005 Bankruptcy Code amendments.¹³ The 2005 Code amendments may also define lawyers providing consumer bankruptcy assistance in return for compensation in certain circumstances as "debt relief agencies."¹⁴ The amendments impose restrictions on debt relief agencies, and authorize courts to enjoin such behavior and impose civil penalties.¹⁵ This does not, however, curtail the authority of State bar disciplinary bodies.¹⁶
2. Several statutes and case law interpreting them provide additional sources of authority on ethics in bankruptcy. 28 U.S.C. §1927 authorizes courts to require counsel to satisfy personally excess costs, expenses and attorneys' fees incurred as a result of unreasonable and vexatious multiplication of proceedings.¹⁷ Concealment of assets, false oaths and claims, including knowing and fraudulent efforts to obtain advantage for acting or forbearing to act in a bankruptcy case, are bankruptcy crimes.¹⁸ Knowing and fraudulent appropriation of property of a bankruptcy estate, or destruction of any document belonging to a bankruptcy estate which came into his charge as trustee, custodian, or other officer of the court, is criminal as well.¹⁹ Knowing and fraudulent agreements to fix fees or compensation in a bankruptcy case is also illegal.²⁰ Further, the bankruptcy court may have the inherent power to sanction attorneys appearing before it for bad faith conduct.²¹ Sanctions can include suspending or disbarring an attorney from practicing in the bankruptcy court for that district.²²
1. When a sanctioned lawyer's conduct is illegal or violates the ethical rules governing his practice of law in a manner that raises a substantial question as to the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects, that lawyer and other lawyers knowing of it are obligated to report that conduct to the applicable state bar disciplinary authorities.²³ Judges are likewise required to report conduct meeting this standard.²⁴
1. Fiduciary Duties of the DIP and DIP Counsel.
2. Fiduciary Duties, In General.

1. A DIP has not only the powers, but also most of the duties of a trustee, and is

a fiduciary to its creditors as well as its equity owners.²⁵ It is difficult to determine, however, the

precise scope of a DIP's fiduciary responsibilities, and how to avoid participating in or assisting

a DIP in the breach of its fiduciary duties, and to counsel a DIP to meet its fiduciary