THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

V. Representation of Creditors and Committees.

A. Conflicts of Interest With Bankruptcy Estates.

1. The bankruptcy court has authority to disqualify counsel appearing before it for ethical violations. Counsel who previously represented a DIP may be asked to advise the people with whom she dealt, the company's insiders, after a trustee takes control. If the estate through the trustee sues the insiders, counsel may be disqualified from representing them if there is a substantial relationship between the litigation and the former estate representation.³³⁹ Because DIP counsel represented the bankruptcy estate, a successor chapter 7 trustee (or creditors committee bringing avoidance actions under a plan) may raise a conflict and disqualify the attorney from any substantially related representation in the case, such as representation of preference defendants.³⁴⁰
2. Several courts have held that a creditor filing a § 727 discharge objection assumes fiduciary duties to act in the best interest of the bankruptcy estate with respect to that litigation.³⁴¹ Some courts have held the creditor cannot settle that litigation through payment of a § 523 claim to the litigating creditor alone without violating fiduciary duties.³⁴²

B. Representation of Multiple Creditors.

1. A single lawyer or firm may not represent one client if that representation will be directly adverse to another client, or may be materially limited by the lawyer's responsibilities to another client, unless the lawyer reasonably believes the representation will not adversely affect the relationship with each client and each consents after consultation.³⁴³ The consultation required for consent entails explaining to each client the implications of the common representation and the advantages and risks involved.³⁴⁴ Common representation of persons having similar interests is generally proper if the risk of adverse effect is minimal and the informed consent requirements are met. If the parties have antagonistic positions in the same bankruptcy case, however, it is generally improper to represent both.³⁴⁵
2. Representation of more than one unsecured creditor would usually be acceptable, as long as there are no questions of preferential treatment, receipt of a fraudulent