Conflicts of Interest: Common Problems Facing Professionals Representing Debtors and Trustees
by Carol Ann Rich
Dudley, Clark & Chan LLP
The General Standards for Employment of Professionals Under the Bankruptcy Code
- Attorneys and other professionals that perform services for a trustee must meet the twin standards of “disinterestedness” and no “interest adverse to the estate” pursuant to 11 U.S.C. §327 (a). In addition, §327(c) provides that a professional will not be disqualified solely because of “such person’s employment by or representation of a creditor,” although upon objection by creditor or the U.S. Trustee, the court “shall” disapprove the employment if there is an “actual conflict of interest.” The same standards apply to professionals employed by a debtor-in-possession.
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The definition of a “disinterested person” is set forth in 11 U.S.C. §101 (14) as a person that (A) “is not a creditor,” (B) “is not and was not within 2 years” before the petition date “a director, officer or employee of the debtor,” or (C) does not have an interest that is “materially adverse.” (Also see 11 U.S.C. §1107(b), which states that a person is not disqualified under §327(a) from employment by a debtor-in-possession “solely because of such person’s employment by or representation of the debtor before the commencement of the case.)”
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Many courts have concluded that the requirements of §327(a) are stricter than the standards applicable to attorneys outside of bankruptcy under the ABA Model Rules of Professional Conduct. See, e.g., In re Federated Department Stores Inc., 44 F. 3d 1310 (6th Cir. 1995); In re McKinney Ranch Assocs., 62 B.R. 249, 254 (Bankr. C.D. Cal. 1986); but see In re Wheatfield Business Park, 286 B.R. 412 (Bankr. C.D. Cal. 2002). Concepts of consent and waiver are often more difficult to apply in the context of an attorney that represents a debtor-in-possession, since the debtor is deemed to be acting as a fiduciary for the entire creditor body. A conflict that runs afoul of §327(a) generally cannot be waived by a debtor-in-possession or trustee, regardless of whether all parties consent.
Read the full outline. (Materials from the 2007 Caribbean Insolvency Symposium)
Holding Company - Operating Company: Ethical Issues in Large Chapter 11 Cases
by Matthew A. Cantor
Kirkland & Ellis LLP; New York
Reorganizations of debtors with complex organizational and capital structures raise issues of real or potential interdebtor conflicts. These conflicts can arise out of intercompany transactions, possible avoidance actions, and issues of solvency (and insolvency) of different debtors at different levels in the corporate structure. Interdebtor issues also arise in the plan process, particularly in connection with classification, voting and substantive consolidation. Any analysis of the appropriate conduct in connection with these issues requires an understanding of the duties of loyalty and care. Considerations of reorganization case management also are important in balancing these competing interests.
Read the full outline. (Materials from 2007 New York City Bankruptcy Conference)