THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

G. Effectiveness of Curative Measures.

1. Bankruptcy courts have often imputed disqualification of a single attorney in a firm to the entire firm, applying the imputed knowledge principle of professional responsibility rules,²⁰⁴ generally without analysis.²⁰⁵ More recent well-reasoned decisions, however, conclude that disqualification should not be imputed to the entire firm if a lawyer is deemed not disinterested for nonconflict reasons, such as prior service as a director or officer of the debtor.²⁰⁶ Screening of a lawyer who advised a former client creditor through implementation of a "Chinese Wall" may also suffice to waive any conflict disqualification.²⁰⁷ However, the Delaware Bankruptcy Court has refused to allow such creative measures, in part because in light of the current climate of distrusting officers and directors, it is entirely possible that all officers of the debtor may be at least interrogated, and the firm would be placed in an untenable position of deciding to question one of the partners.²⁰⁸
2. Several courts have allowed counsel to overcome disinterestedness concerns and represent a DIP if curative measures are taken to resolve non-disinterestedness status after full disclosure, such as such as sale of shares in the DIP company or resignation from the board of directors or an officership of the company and recusal from board deliberations, ceasing to represent an affiliated party, or returning possibly preferential fee payments.²⁰⁹ Appointment of special counsel to deal with conflict-related claims may suffice.²¹⁰ Other courts have such actions unavailing.²¹¹
3. In several instances, courts have also allowed counsel to represent the DIP despite status as a creditor, if the attorney waives the claim.²¹² Again, other courts refuse to sanction such proposals,²¹³ and a few courts have allowed counsel to represent the DIP without requiring any corrective action.²¹⁴

4. Some courts have also allowed counsel to represent the DIP despite failure

initially to seek court approval for the appointment, nunc pro tunc.²¹⁵ Others have flatly disallowed fees for services performed prior to or without a court appointment order.²¹⁶ Most courts have held that fees cannot be awarded on a quantum meruit

basis or substantial contribution basis unless court approval of employment is obtained, initially or nunc pro tunc where such retroactive relief is available.²¹⁷

H. Disclosure is Mandatory.

1. Bankruptcy Rule 2014 requires disclosure of "any proposed arrangements for compensation, and to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee." The rule is much more comprehensive than the applicable statutes, 11 U.S.C. §§ 327 and 1103.²¹⁸