THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

tribution, or otherwise assisting insiders in actions detrimental to the estate and creditors.⁶² Similarly, courts have held that no compensable value is provided to the estate by attorneys working on a reorganization that should not have been filed or cannot succeed.⁶³ Attorneys are also duty bound to recommend against pursuing litigation when the cost exceeds its likely value.⁶⁴

1. In general, only the DIP or trustee is empowered to file a Rule 9019 settlement motion, and must exercise fiduciary duties in evaluating whether to do so.⁶⁵ Creditors and other parties affected by or interested in a particular lawsuit may have then own agendas that conflict with the best interest of the estate.⁶⁶ However, a DIP's fiduciary duties to manage the estate for the benefit of creditors may also conflict with the DIP's own interests when a settlement of litigation is proposed, especially when it either benefits insiders or adversely affects them by paying creditors but leaving little for the equity. Any settlement with insiders must be scrutinized.⁶⁷ When the estate is insolvent, the views of creditors on any settlement are clearly paramount.⁶⁸ When there is a potential for solvency, such that the debtor has a stake in the outcome of litigation, the interests of the debtor's equity must be taken into consideration.⁶⁹ But the debtor has a conflict in weighing its own desires against its fiduciary duties to creditors, who bear the risk of continued litigation without the potential benefit of a greater return. At least one court has concluded that either a Chapter 11 trustee should be appointed or the case should be converted to Chapter 7 because the conflict cannot be reconciled.⁷⁰ Because a settlement with the trustee (or DIP) binds creditors of the estate, settlement approval should not be sought without a full, independent investigation of the facts and circumstances sufficient to exercise independent business judgment.⁷¹
2. When an estate is solvent, DIP fiduciary duties may preclude a bankruptcy filing at all. Bankruptcy cannot be a tactical device for litigation leverage. If a solvent debtor is not suffering any adverse financial or operational effects, a bankruptcy petition may be deemed filed in bad faith.⁷² Even if the filing is proper, a solvent DIP may not use avoidance powers to obtain a windfall for the equity holders at the expense of the non-insider creditors.⁷³

7. Timely and complete financial reporting and recordkeeping is an important