2006 NORTON BANKRUPTCY LAW SEMINAR MATERIALS
THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY
By Susan M. Freeman
*This outline is adapted from Chapter 27, Ethical Responsibilities,
Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)
element of the DIP's fiduciary duty of care.74 So is accurate documentation of postpetition transfers‹which must be legitimate, authorized transfers, especially if the transferred assets are collateral of a creditor.75 DIP fiduciary duties to protect and preserve the estate should also be taken into account in determining whether to seek court authorization for early payment of critical vendors.76 Paying higher prices to a vendor postpetition to reduce prepetition debt results in unauthorized postpetition transfers and a violation of DIP management's duties to all creditors.77 Failure to comply with cash collateral and other Code restrictions may result in liability of the DIP's officers.78
C. DIP Duties With Respect to Asset Sales.
-
A fiduciary duty of loyalty includes a duty to refrain from self-dealing with estate assets, unless the transaction is inherently fair, with the earmarks of an arm's length bargain.79 For this reason, and because of the prohibition of the bankruptcy crimes statute, neither the Trustee, DIP nor their professionals (nor the professionals' employees) may directly or indirectly acquire estate assets, even at an auction.80 The fiduciary is not to benefit at the expense of the estate and creditors, or use its power for personal advantage to their detriment, no matter how meticulously the technical requirements for doing so are met.81
-
The DIP's fiduciary duties are defined, at least in part, by the statutory framework that empowers the DIP to act and specifies procedures under which it must act. The Seventh Circuit held that a DIP meeting the standards of the Bankruptcy Code and Rules sufficiently meets its fiduciary obligations to creditors, at least in an asset sale context.82 The court refused to apply to a DIP a common law trustee's duties to disclose to its beneficiaries all material facts that might affect the value of the trust's assets or the desirability of a transaction.83
-
If bankruptcy rules, orders and procedures for asset sales are not met however, especially including notice rules, the DIP may be sanctioned for breach of fiduciary duties to injured creditors.84 Adequate and reasonable notice is essential to enable parties in interest to judge whether the sale is in the best interest of the estate and in good faith, i.e. not the result of fraud, collusion, or any attempt to take unfair advantage of other potential purchasers.85 While
