THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

E. Duties of DIP Counsel.

1. Counsel's role with respect to the DIP's fiduciary duties, and DIP

management agendas, is limited but critical. Counsel may exert some or even considerable influ

ence on bankruptcy strategy, but management still makes the final decisions.⁹⁶ Ethically and

legally, DIP counsel can only advise the DIP's designated representative, who makes the

decisions.⁹⁷ The DIP and its constituents are not required to be disinterested.⁹⁸ Attorneys taking

direction from interested insider management are not substitutes for the trustees Congress delib

erately did not require, and ethically cannot be so.⁹⁹ But they can and should develop "client

control" through advising the client on the parameters of available alternatives and remedies, and

not allowing a client to dictate activity in a case inconsistent with legal requirements.¹⁰⁰

Lawyers can and must take care to assure that representations to the court are accurate.¹⁰¹ They

must aggressively require clients to provide evidence supporting questionable positions on key

issues.¹⁰²

1. Vigorous advocacy is ethical and appropriate in bankruptcy as in other cases, as long as it meets Rule 11 standards with a good faith basis for the facts and law asserted on positions taken for reasons other than harassment or delay.¹⁰³ In Chapter 11 cases, good faith turns in part on whether reorganization is still possible.¹⁰⁴ Thus, acquiescing in and carrying out a client's "scorched earth" strategy or otherwise assisting insiders in actions detrimental to the estate and creditors, if it is shown that counsel knows reorganization is hopeless, likely would not meet the good faith standards of ethics and Bankruptcy Rule 9011.¹⁰⁵ Pursuing a plan that benefits insiders, at the considerable expense of the arms-length creditors, may also exceed the boundaries of good faith in some circumstances, and be considered DIP self-dealing.¹⁰⁶ Acquiescing in DIP management self-dealing,¹⁰⁷ without any attempt at counselling and without full disclosure to the court and creditors of insider involvement in (and benefit from) transactions, is a breach of DIP counsel's fiduciary duties to the estate.¹⁰⁸ Advocating a sale agreement with a "no shop" clause instead of seeking or entertaining other offers to maximize the estate's value, especially if the clause is not disclosed, violates fiduciary duties.¹⁰⁹ Even continuing with a stagnant reorganization once it should be clear no plan can be confirmed may be sanctionable.¹¹⁰ Counsel also should not proceed with litigation where the likely recovery will be less than the litigation cost, ¹¹¹ or file a plan that counsel knows is unconfirmable, at least without highlighting plan provisions that appear to bypass Code requirements.¹¹² Disclosure to the court of diverging interests between insiders and the DIP entity may significantly alleviate conflict concerns, since other parties could then knowingly argue for contrary treatment.¹¹³
2. Rather than carrying out client directions exceeding good faith boundaries, the DIP's attorney has ethical obligations to counsel his DIP client with respect to its fiduciary