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)
sales to insiders are not bad faith per se, full disclosure is critical if the watchful eyes of creditors are to ensure that transactions are in good faith, and the prices are reasonable.86 Counsel may be criminally liable for obtaining sale approval without full disclosure of a side deal compensating an insider personally.87
4. A DIP must have an articulated business justification for using, selling, or leasing estate property outside the ordinary course of business, and the transaction must be in the best interest of the estate, to satisfy the DIP's fiduciary duties to the creditors and equity holders. The bankruptcy judge is to consider all salient factors in evaluating the proposed transaction, and act to further the diverse interests of the debtor, creditors and equity holders.88 A "no shop" clause in a sale or lease agreement has been held to violate the DIP's fiduciary duties by preventing it from maximizing the estate's value.89
D. Drafting a Reorganization Plan.
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In the context of drafting a reorganization plan, the DIP's fiduciary responsibilities must include exercising reasonable care and diligence to restructure the company in a way that is feasible and enhances the estate's overall value. The DIP must try to balance the interests of different parties fairly, but within the structure of the Bankruptcy Code.90 The Code's absolute priority rule restricts distributions to equity only in the event of cramdown with equity retaining an interest, however. The DIP is not precluded from bargaining for a reorganization share for equity, as long as the equity is not attempting to torpedo the reorganization or benefit itself alone at the expense of creditors.91 In fact, the Code provides for the debtor, not the DIP, to propose a plan, and allows the debtor to confirm it over creditor objections as long as creditors receive as much as they would in chapter 7.92
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A plan will not be deemed in good faith if the court cannot determine that management conflicts of interest did not affect treatment of creditors.93 The disclosure statement accompanying the plan should reflect the DIP's fiduciary duty to actively investigate and disclose all estate assets.94 It should be based on credible projections to rehabilitate the existing business, not "incubate" an entirely new business.95
