THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

1. "Connection" has been broadly construed.²¹⁹ It is not for the DIP or its counsel to determine unilaterally whether a connection is relevant; the court is to review all connections and decide whether there are any disqualifying conflicts.²²⁰
2. Some courts have said that even the most trivial and attenuated and outdated connections must be disclosed.²²¹ But despite the broad directives, the actual connections on which courts have focused in cases sanctioning professionals for nondisclosure of connections

(even without damage to the estate) have been within the legitimate scope of inquiry under the applicable statutory standard. At least one court expressly recognized that connections which are meaningless under the statutory tests for employment approval need not be disclosed.²²² In

Rusty Jones, the court noted it was not necessary for the debtor's counsel to disclose he had owned a hot dog stand 20 years before with one of the debtor's indirect owners, because that connection was remote, de minimus and irrelevant to a § 327 analysis.

1. What is important are connections that presently exist or recently existed between the attorney and the parties in interest, and also past connections of business or personal nature that are either related to the bankruptcy proceedings or could reasonably have an effect on the attorney's judgment in the case.²²³ This principle was indirectly recognized by the Second Circuit in Arlan's Dep't. Stores.²²⁴ DIP counsel argued in Arlan's that the predecessor to Rule 2014 required "disclosure only of present 'connections' that are 'adverse to the debtor'" and that "every large New York firm has had prior relations with almost every other large New York firm, and to require the specifications of all of these past associations would engulf the court in trivia."²²⁵ The court responded that the undisclosed fee sharing agreement at issue in the case was a connection that was "hardly trivia," and indeed could reasonably be construed as "trafficking in bankruptcy appointments," implicitly acknowledging that normal professional and social relationships among professionals do not warrant disclosure.
2. When analyzing the need to disclose, the court may assume misplaced loyalties and other dire results of direct and indirect connections, and assume the worst motives and results of potential litigation. It may assume potential conflicts will become actual conflicts. The test for disclosure is not whether counsel believes the connection to be de minimus; the test is whether the connection is relevant to the statutory standards, should the court conclude it is significant instead of trivial. As the court put it in Rusty Jones, it is not enough that the attorneys did nto feel a conflict existed; "it should have been apparent from Šthe connectionsŠ that conflicts of interest would at least be an issue."²²⁶ In Hathaway Ranch Partnership, the court phrased it as "all facts that may be pertinent to a court's determination of whether an attorney is disinterested or holds an adverse interest to the estate."²²⁷
3. Once the relevancy threshold for disclosure of even de minimus connections is met, sufficient information needs to be disclosed to enable the court to judge whether the connection is disqualifying. Disclosures must be sufficiently detailed to enable the court to understand the magnitude of the connections and potential conflicts, and must be strictly accurate.²²⁸ An employment application with full disclosure must be made for each professional firm employed; undisclosed subcontracting is impermissible.²²⁹ Disclosure through the schedules and statement of affairs, an exhibit to the petition, testimony at the first meeting of creditors, or monthly operating report entries is inadequate. The court has no duty to search the file and ferret out information on conflicts.²³⁰