American Bankruptcy Institute

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1 ConflictsCheck:Bankruptcy sethicrulesinpractice ByArthurKimball Stanley 1 Forlawyers,conflictsofinterestrulesarecritical.Suchrulesareessentialinassuringthe adequaterepresentationofclients,thepreservationofconfidencesandmaintenanceofthe integrityoftheadversarysystem. 2 Inbankruptcycases,theserulesareimportantaswell,but,such proceedingsrequiredifferentethicalconsiderationsthanthetypicaltwo partycivilproceeding. Giventhemultiplicityofpartiesinbankruptcyproceedingsandthedifferinginterestsina bankruptcycase,congresshasimposedspecialrulesgoverningtheemploymentofbankruptcy professionalsunderthebankruptcycode(the Code ). 3 InalargecorporateChapter11reorganization,interestsinthedebtor sestateareatleastas diverse as the corporation s capital structure and parties can find themselves with varying alliances. As interests shift, so must the conflict concerns of the lawyers representing each party. The problems this maze of potential conflicts can create have been a topic of debate among bankruptcyscholarsforyears. 4 Thenuancesofbankruptcy sconflictrulesarenotjustacademic.attorneysatthehighestlevel of the bankruptcy bar have found themselves running afoul of the Code s conflict rules. In 1994, debtor'scounselforthelesliefaycompanieswasforcedtogiveuplargeportionsoffeesearned from its representation of the debtor for failing to properly disclose conflicts relating to an investigationoflesliefay smanagement. 5 More recently, attorneys representing LyondellBasell in its Chapter 11 reorganization were accusedofallowingconflictstoresultinanunsatisfactorilylowsettlementthat waspresentedto the court for approval. 6 While the accusations made against counsel were forgotten when the settlementamountwasincreased,theepisoderemainsastarkreminderforbankruptcyattorneys thatconflictissuescanberaisedatanytimeduringacase. 7 1J.D.Candidate2010,BostonCollegeLawSchool. 2Restatement(Third)oftheLawGoverningLawyers 201cmt.b(1996). 3 Many cases that have cited the common fund nature of bankruptcy the fact that all professional fees are paid by the estate andpastillperceptionofcorruptpracticeintheinsolvencybarastherationalforholdingbankruptcyattorneystoa sometimeshigherconflictofintereststandardsthaninotherareasofpractice.see,e.g.,inreewcinc.,138b.r.276,279(bankr. W.D.Okl.1992).Forageneralhistoricaloverviewoftheconflictissuesthatplaguedtheearlybankruptcybarandtheefforts towardsreformduringthe20 th century,seedavida.skeel,debt SDOMINION:AHISTORYOFBANKRUPTCYLAWINAMERICA, (2003). 4 See, e.g., Christopher Ashby, Bankruptcy Code Section 327(a) and Potential Conflicts of Interest Always or Never Disqualifying?, 29 Hous. L. Rev. 433; Alexander G. Benisatto & Alyson M. Fiedler, Note: The Disinterested Standard of Section 327(a):ApplyingAnEquitableSolutionforPotentialConflictsinSmallBankruptcies,7Am.Bankr.InstL.Rev.363(1999);NancyB. Rapoprt,TheIntractableProblemofBankruptcyEthics:SquarePegRoundHole,11J.Bankr.L.&Prac.391(2002);GeraldK.Smith, Standards for the Employment of Professionals in Bankruptcy Cases: A Response to Professor Zywicki s Case for Retaining the Disinterestedness Requirements for Debtor in Possession Professionals, 18 Miss. C. L. Rev. 327 (1998)); Joseph Vaccaro & Marc Milano,Section327(a):AStatuteinConflict:AProposedSolutiontoConflictsofInterestinBankruptcy,5Am.Bankr.Inst.L.Rev 237(1997); Todd Zywicki, Of Bubbling Potts and Bankruptcy Conflicts: A Reply to Smith and Wolfram, 18 Miss. Col. L Rev. 399 (1998). 5Seegenerally,InreLeslieFayCompanies,Inc.,175B.R.525(Bankr.S.D.N.Y.1994). 6 David McLaughlin, Unsecured Creditors Slam Lyondell s Law Firm, WSJ Blogs: Bankruptcy Beat, available at creditors slam lyondells law firm/tab/article/. 7 See Brian Baxter, $450 Million Settlement with Creditors Could See Lyondell Exit Chapter 11, THE AM LAW DAILY, Feb

2 17th Annual Northeast Bankruptcy Conference This article seeks to provide an overview of the conflict requirements as they apply in the bankruptcycontext.thebrieftouroftheissuesinvolvedisintendedtogivepractitionersasenseof thecomplexityofbankruptcyconflictrulesand,inparticular,whenanattorneyhasaconflict,when heorshedoesn thaveaconflictandhowtodealwiththepotentialuncertaintiessurroundingthe issue. I. TheCodeProvisions The Code contains specific rules governing the employment of attorneys. All professionals representingadebtormustobtaincourtapproval.thecodedoesnotspecificallydefine conflictof interest. Courts, instead, are left to examine the various employment related provisions of the Codetointerpretwhenanattorneymayormaynotrepresentanestateinbankruptcy. Section327(a)oftheCodeprovidesthestatutorylanguageappliedindeterminingwhethera professional s representation of a debtor is appropriate. 8 The section has two requirements, the professional(1) may not hold or represent an interest adverse to the estate and (2) must be a disinterestedperson asthattermisdefinedundersection101ofthecode. 9 Section101(14)(E) provides, in part, that a disinterested person as a person who does not have an interest materially adverse to the interest of the estate or any class of creditors or equity security holders[.] 10 In addition, Section 328(c) of the Code, which provides for compensation of professionals,statesthatthecourtmaydenycompensationforservicesperformedbyanattorney if, during the attorney s employment by the estate, the attorney is not a disinterested person, or representsorholdsaninterestadversetotheinterestoftheestate[.] 11 Asanumberofcourtshavenoted,theCode sdefinitionofdisinterestedrepeatsthereference toadverseinterestsincludedseparatelyundersection327(a),albeitwithamaterialityqualifier. 12 Consequently,thetworequirements telescopeintoasinglehallmark. 13 Unfortunately,theCode doesnotdefine aninterestadversetotheestate. Understandingtheconflictsrulesastheyapply inthebankruptcycontextrequiresunderstandingthejudicialinterpretationofthisprovision. a) DefininganInterestAdversetotheEstate JudicialapplicationoftheCode s interestadversetotheestate languagehastakenavariety ofpaths.courtsagreethattherelevantunderlyingquestionis whetheranattorneyhasmeaningful incentivetoactcontrarytothebestinterestsoftheestate. 14 Thereasoning,statedsimply,is: ifit isplausiblethattherepresentationofanotherinterestmaycausethedebtor sattorneystoactany differently than they would without the other representation, then they have a conflict and an interestadversetotheestate. 15 Courtsdifferontheextenttowhichtheincentivetoactcontraryto thedebtor sinterestsismeaningful.asonecourtnoted,the difficultareaiswhenaliveconflictof 8See11U.S.C. 327(a).Section327(a)oftheCodediscussestheemploymentofprofessionalsbythedebtor.Specifically, the section states: the trustee, with the court s approval, may employ one or more attorneys, accountants, appraisers, auctioneers,orotherprofessionalpersons 9See11U.S.C. 327(a). 10See11U.S.C. 101(14)(E). 11See11U.S.C. 328(c). 12InreMartin,817F.2d175,181(1stCir.1987). 13Id. 14InreLeslieFayCompanies,Inc.,175B.R.at Id. 510

3 interesthasnotquiteemerged,yetthefactualscenarioissufficientlysusceptibletothatpossibility soastomaketheconflictmorethanmerely hypotheticalortheoretical. 16 Some courts draw a line between the appearance of potential conflict and actual conflict, holdingthatonlyactualconflictspreventrepresentation. 17 Thesecourtsdefineaconflictasactual when the professional serves two presently competing and adverse interests. 18 A potential conflict,ontheotherhand,arises whenthecompetitiondoesnotpresentlyexist,butmaybecome activeifcertaincontingenciesarise. 19 Thesecourtsrecognizethatpotentialconflictmaybeenough tobaranattorneyfromservingasdebtor scounsel,butleavethisdecisionuptothediscretionof the bankruptcy judge supervising the estate. 20 These courts rely on the fact that historically bankruptcy courts have been given wide latitude to balance efficiency and economy with the protectionoftheintegrityofthebankruptcyprocess. 21 Theconsiderationofactualconflictsreigns,however,andcourtsoftenexaminetheextentto which a relationship between an attorney and another party rises to a level that a court would consider it adverse to the interest of the estate. 22 In applying this "adverse interest test," these courtsinquirewhethertheattorney(1)hasanyeconomicinterestthatwouldlessenthevalueof the bankruptcy estate of create a dispute in which the estate is a rival; (2) possesses a predisposition that would bias the attorney against the estate. 23 Other variations on this test include,asnotedabove,askingwhethertheattorney semploymentcreatesameaningfulincentive toactcontrarytothedebtor sbestinterest. 24 Thesecasesalsoemphasizeabalancingapproachthat takesintoaccountalltherelevantfactstodeterminewhetheraconflictissufficientlysignificantto barthecourt sapprovalofanattorney sretention. 25 Courtsthathaveoptedforthislessstructured application of the Section 327(a) have argued that debate in other courts about the proper approachhas beenmoresemanticthansubstantive andthatresults werelargelydrivenbythe factsofeachcase. 26 Thefactdrivenresultsofbankruptcyconflictrulesareparticularlyevidentinlarge,complex debtorcases.inthelargestbankruptcycases Enron,GeneralMotors,LehmanBrothers theability ofadebtororotherinterestedpartiestoretaincompetent,conflictfreecounselislimited. 27 Insuch cases, use of co counsel for special litigation when conflicts do arise, and law firm screening systems to ferret out and disclose newly arising conflicts over the course of representation, are usuallyconsideredsufficienttoappointcounseleventhoughthepossibilityofanadverseinterest exists. 28 b) ParticularKindsofConflictsandExceptionsto327(a) 16Id.at InreMarvelEntertainmentGroup,Inc.,140F.3d463,476(3dCir.1998). 18 In re Raymond Professional Group, Inc., 421 B.R. 891, 902 (Bankr. N. D. Ill. 2009) (Citing In re American Printers & Lithographers,148B.R.862,866(Bankr.N.D.Ill.1992)). 19Id. 20SeeInreMarvelEntertainmentGroup,Inc.,140F.3dat476(CitingInre.BH&P,Inc.,949F.2d1300,1317(3dCir.1991). Thisapproachhasbeenrecognizedbyavarietyofcourts.See,e.g.,InrePenny,334B.R.517,520(Bankr.D.Mass.2005). 21Inre.BH&P,Inc.,949F.2d1300,1317(3dCir.1991)(CitingInreMartin,817F.2dat175). 22SeeInreRoberts,75B.R.402(D.Utah1987). 23SeeInreEnronCorp.,2002WL at*8(CitingInreAroChemCorp.,176F.3d610,623(2dCir.1999)). 24InreMartin,817F.2d175at InreLeslieFayCompanies,Inc.,175B.R.at Id. 27SeeMarciaL.Goldstein,RetentionofProfessionalsinBankruptcyCases:EthicalIssues&SpecialConsiderations,1172ALI ABICourseofStudy:CommercialRealEstateDefaults,Workouts&Reorganizations(2006). 28Id. 511

4 17th Annual Northeast Bankruptcy Conference Everyinterestinabankruptcycaserepresentsapotentialconflict,buttherearetwokindsof relationships that come up most often for attorneys seeking to represent a bankruptcy estate: i) concurrentrepresentationofadebtoranditscreditors;ii)formerrepresentationofcreditorsorthe debtor. i. ConcurrentRepresentationofCreditorsbyDebtor scounsel 29 Courtshavegenerallyheldthatcurrentrepresentationofacreditorbyanattorneyapplyingto representthedebtorisnotbyitselfsufficientgroundsfordisqualification. 30 Infact,Codesection 327(c)specificallyallowsforsuchapossibility. 31 Disqualificationonothergrounds,however,isstill possible. 32 As discussed above, the courts focus specifically on whether the attorney s representation of the creditor is adverse to the interest of the estate. 33 The courts will examine whether it is plausible that the representation of another interest will lead the attorney to act differentlythanitwouldwithouttherepresentation. 34 In most cases, concurrent representation of a debtor and a creditor by an attorney will be found unacceptable. Courts have generally found it clear that when an attorney seeking employmentbyabankruptcytrusteeisconcurrentlyrepresentingotherparties,hisorherdutiesof loyaltyandconfidentialitywillcombinetomakeitverydifficultfortheattorneytoovercomethe requirementthatheorshemustnotholdorrepresentaninterestadversetotheestate. 35 Still, there are situations in which such concurrent representation is allowed. 36 In recently decided In re Kobra Properties, an Eastern District of California Bankruptcy Court allowed temporaryconcurrentrepresentationofadebtorandcreditorbecausetheparties interestswere sufficientlyalignedsoastonegatetheplausibilityofanadverseinterestexisting. 37 Inanothercase, thistimeinthesoutherndistrictofcalifornia,acourtallowedafirmtorepresentbothadebtorand the largest secured creditor in the case because the representation of the secured creditor concernedamatterunrelatedtothebankruptcy. 38 In large complex debtor s cases, it is nearly impossible to find debtor s counsel with the resources to handle such cases that does not have a conflict. 39 Courts, therefore, have taken a pragmatic approach to such cases. 40 Specifically, courts will usually allow for conflicts counsel to handlematterswhereanadverseinterestarises,whileallowingtheconflictedattorneytoprovide overallrepresentationtotheestate. 41 Thesecasesarehighlyfactspecific,butitishardtoimagine 29Therulesdifferdependingonwhethertheattorneyseekstobeappointedcreditors'committeecounselorcounselforthe trusteeordebtor.attorneysmaybeappointedcommitteecounseleventhoughtheyrepresentinterestsadversetotheestateif thoseinterestsconcernmattersthatare:(1)unrelatedtothebankruptcycase;(2)notadversetothecommittee sinterestinthe bankruptcy case; or (3) pre date the professional s employment by the committee. See 11 U.S.C. 1103(b); Daido Steel Co. v. OfficialComm.ofUnsecuredCreditors,178B.R.129,132(N.D.Ohio1995);InreFirstmarkCorp.,132F.3d1179, (7th Cir.1997). 30InreDevelopmentCorp.ofPlymouth,Inc.,283B.R.464,468(Bankr.E.D.Mich.2002). 31See11U.S.C InreDevelopmentCorp.ofPlymouth,Inc.,283B.R.at SeeInreGranitePartners,L.P.,219B.R.22,33(Bankr.S.D.N.Y.1998). 34SeeInreEnronCorp.,2002at*8(CitingInReLeslieFay,175B.R.at533). 35InreKobraProperties,406B.R.396,404(Bankr.E.D.Cal.2009). 36SeeId. 37SeeId. 38SeeInreDynmark,Ltd.,137B.R.380,381(Bankr.S.D.Cal.1991). 39SeeGoldstein,supranote26. 40Id. 41Seee.g.InreEnronCorp.,etal.,ExcoResources,Inc.v.Milbank,Tweed,Hadley&McCloy,2003WL223455(S.D.N.Y). 512

5 alternativeoutcomesforlargedebtorcases,giventhecurrentstructureoftheinsolvencybarand theextentoftherelationshipsofmanylargedebtors. Therearenot,however,verymanycasesthatfindconcurrentrepresentationofadebtoranda creditordoesnotconstituteaninterestadversetotheestate.thereisathoroughlygrayareawhere concurrentrepresentationisallowed.onepossiblereasonforthisabsenceofcasesisthatsection 327(c) of the Code states that an attorney is not disqualified solely because of the attorney s employmentbyorrepresentationofacreditor,unlessthereisanobjectionbyanothercreditoror the U.S. Trustee. 42 Courts have viewed Section 327(c) as providing a limited exception to the generalrulein327(a). 43 ii. FormerRepresentationofPre PetitionDebtor Pre petitionrepresentationofthedebtorisnotusuallyabartoemploymentbythedebtorin possession.thecodespecificallyprovidesanexceptionforattorneysofthepre petitiondebtorto provide services to the debtor post petition. 44 Code section 1107(b) states a person is not disqualifiedforemploymentundersection327ofthistitlebyadebtorinpossessionsolelybecause ofsuchperson semploymentbyorrepresentationofthedebtorbeforethecommencementofthe case. 45 Courtshavebeencarefultoconstruethisprovisionnarrowly,findingthatSection1107(b) does not alleviate the requirement that professionals to be employed must be disinterested[for purposesofsection327(a)],butsimplyprovidesthatpre petitionemploymentofprofessionalsby adebtordoesnotautomaticallydisqualifytheperson. 46 Theresultisthattheadverseinteresttest is still applied by courts in evaluating representation of a debtor in possession. 47 As with any evaluationofanattorneywithapotentiallyproblematicrelationship,thecourtwilllookatallthe factsandassessthelikelihoodoftherelationshipchangingtheattorney sbehaviorinrepresenting theestate. 48 The rule for a trustee or debtor in possession to employ counsel for a special purpose is governed by Section 327(e), which allows, with the court s approval, employment of an attorney who has represented the debtor for a specific purpose, other than conducting the bankruptcy case. 49 Courts have interpreted this provision to allow for the use of a more lenient standard in appointing counsel who had represented the debtor to represent the trustee or debtor in possession in specific matters. 50 In effect, the provision allows attorneys seeking to represent a trustee or debtor in possession under Section 327(e) to only disclose its potentially conflicting relationshipspertainingtothespecialmatterforwhichithasbeenhired. 51 Generalrepresentation ofatrusteeforthepurposesofthebankruptcycaseremainsgovernedbysection327(a). 52 Under this provision, an attorney with a relationship with the debtor that might prove adverse to the estateadministratedbythetrusteewillbebarredfromprovidingrepresentation See11U.S.C.327(c). 43Inre7677EastBerryAve.Associated,L.P.,419B.R.833,841(Bankr.D.Colo.2009). 44See11U.S.C.1107(b) 4511U.S.C.1107(b). 46InreLakesideICorp.,120B.R.231,233(Bankr.M.D.Fla1990). 47Id.at Id.at See11U.S.C.327(e). 50InreBlack&WhiteCabCo.,Inc.,175B.R.24,26 27(Bankr.E.D.Ark.1994). 51Id. 52Id. 53SeeInreDasom,Inc.,180B.R.430(Bankr.W.D.Pa.1995). 513

6 17th Annual Northeast Bankruptcy Conference Law firms that have represented debtors pre petition have found themselves conflicted because they themselves are creditors of the debtor. 54 In one case, a prominent bankruptcy firm was found to be conflicted out of representing a debtor because it had received pre petition payments for legal work in preparation of the filing of the petition. 55 The Court found that such payments were potentially avoidable as preferences and the case was considered by some as a primeexampleoftheoverlyburdensomeprovisionsofsection327(a). 56 c) ConflictsandDisclosureRequirements Conflict disclosure obligations in the bankruptcy courts are governed by Bankruptcy Rule 2014, which requires attorneys seeking to be employed by the debtor to submit an application stating tothebestoftheapplicant sknowledge,alloftheperson sconnectionswiththedebtor s creditors and any other party in interest [.] 57 These disclosure rules present a challenge to attorneys independent of the Code s provisions, since failing to provide what the courts deem sufficient disclosure has been found to be cause for sanction. 58 Such sanction can include disqualificationascounselorthedisallowanceoffees. 59 IninterpretingRule2014requirements,courtshavegenerallyfoundthattheburdenisonthe attorneytoprovidethecourtwiththefullestpossiblepictureoftheattorney spositionwithregard totheinterestinthebankruptcyestateitseekstocounsel. 60 Thecourtshaveoftenfoundthatthe disclosurerequirementsofrule2014aremoreseverethantheconflictrequirementsinthecode. 61 While Code Section 327 generally requires that a conflict be in some sense material to bar an attorney s employment, Rule 2014 requires all connections that are not de minimis to be disclosed. 62 Thedifferencebetweenwhatismaterialanddeminimishasbeenrelativelywelldelineatedby thecourts.rule2014applicantsarenotexpectedtodisclose everypastorremoteconnectionwith everypartyininterest. 63 Attorneysare,however,expectedtodiscloseallconnections presentlyor recentlyexisting,whethertheyareofbusinessorprofessionalnature,whichcouldreasonablyhave an effect on the attorney s judgment in the case. 64 Boilerplate disclosure is sufficient to free the applicantfromconflictsthatareunknownatthetimethedisclosureissubmitted. 65 Butboilerplate isnotsufficienttofreetheapplicantfromtheresponsibilityofdisclosingrepresentationof known andsignificantparties thatmightraisequestionsaboutconflicts. 66 CourtshavegenerallyfoundthatinadditiontotheinitialdisclosurerequirementsofRule2014 when a representation begins, Section 327(a) creates a continuing obligation to disclose conflicts 54SeeInreLackawannaMedicalGroup,P.C.,323B.R.626(Bankr.M.D.Pa.2004). 55SeeInrePillowtex,304F.3d246(2002). 56BruceH.WhiteandWilliamL.Medford,DisinterestednessandPreferentialTransfers:Can'tWeTalkAboutThisLater,21 JANAm.Bankr.Inst.J.38(December2002) 57SeeFed.R.Bankr.P SeeInreEnronCorp., at*5. 59InreGraniteSheetMetalWorks,Inc.,159B.R.840,845(Bankr.S.D.Ill.1993). 60SeeInreEWC,Inc.,138B.R.at280(explainingthatthecourt hasneithertheobligationnortheresourcestoinvestigate thetruthfulnessofinformationsupplied,ortoseekoutconflictsofinterestnotdisclosed. ). 61SeeInreLeslieFay,175B.R.at Id. 63InreElSanJuanHotelCorp.,239B.R.at Id. 65InreLeslieFay,175B.R.at Id. 514

7 thataresubsequentlydiscoveredorthatarisepriortotherule2014application. 67 Attorneysmust providepromptnoticetothecourtifapotentialconflictarises. 68 A court s view on the extent to which Rule 2014 disclosure is sufficient when it comes to conflictsisdeterminedbasedonthefactsofagivencase. 69 AswithaSection327analysis,thebest approach for practitioners is to reflect on what connections might be or become relevant to the debtor sbankruptcyproceedingingeneral.inotherwords,discloseeverything. d) CurativeMeasures Therearesomesituationsinwhichacourtwillallowafirmholdinganinterestadversetothe bankruptcyestatetotakecurativemeasuresinordertorepresentthedebtor.insuchcases,after full disclosure has been provided, courts have allowed attorneys to cease representing a former clientinordertoeliminatetheadverseinterestandmeetsection327(a)standards. 70 Inothercases, courts have allowed debtor s attorneys to appoint special counsel to deal with issues in which a conflictarises,whilemaintainingoverallmanagementofthedebtor sbankruptcycase. 71 Thecourts closelymonitorsuchappointmentsandtheattorneyfoundtohaveanadverseinterestisundera continuingdutytomonitorthesituationanddiscloseanychangesthatwouldrequirethecourtto reconsidertheconflictissues. 72 The special counsel approach has been particularly useful in large debtor cases, where qualifiedcounselthatisnon conflictedastoeveryissuethatmightariseinthebankruptcycourtis unlikely to be found. 73 During the Enron bankruptcy, the use of special counsel was allowed for Milbank, a prominent New York law firm, to be employed as debtor s counsel. 74 One of Enron s creditors had moved to have Milbank disqualified as counsel for the Committee of Unsecured Creditorsbecauseofitspriorrelationshipwithtwoofthosecreditors JPMorganandCitigroup that allegedly aided in misleading investors about Enron s pre petition financial position. 75 The creditorsallegedthatmilbankwouldworkwiththosecreditorstocoverupanyevidencethatmight leadtotheequitablesubordinationofthecreditors. 76 Rejectingthesearguments,thebankruptcy judgeruledthattheestablishmentofethicalwallswithinmilbankandtheuseofspecialcounselto investigate potential equitable subordination of specific creditors would be sufficient to cleanse Milbankoftheconflict. 77 Inrulingontheissue,thejudgecitedthatsucharrangementshadbeen usedinnumerouslargebankruptcies. 78 Somecourtsarewary,however,abouttheextenttowhichcurativemeasuresareappropriate. Insomecases,courtshavefoundthatanattorney sadverserelationshipwastooseveretobecured by appointment of special counsel. 79 For example, in In re Amdura Group, a court was asked to approveanattorney srepresentationofmultipledebtorswhoalsoactedascreditorstoeachother 67Romev.Braunstein,19F.3dat InreGranitePartners,L.P.,219B.R.at22. 69Romev.Braunstein,19F.3dat58. 70SeeTWI,Intern.,Inc.v.VanguardOilandServiceCo.,162B.R.672(S.D.N.Y1994). 71SeeInreeToys,Inc.,331B.R.176(Bankr.D.Del.2005). 72SeeInreLeslieFay,175B.R.at SeeGoldstein,supranote26. 74SeeInreEnronCorp.,2002WL (Bankr.S.D.N.Y2002). 75Id. 76Id. 77Id.at11. 78Id. 79SeeInreAmduraCorp.,121B.R.862,869(Bankr.D.Colo.1990). 515

8 17th Annual Northeast Bankruptcy Conference in the debtors jointly administrated bankruptcy case. 80 These debtors had operated as a single businesspre petitionandthefirmhadbeentheirlegalcounsel. 81 Anticipatingtheconflictinherent in representing a group of debtors whose interests were adverse to one another, the law firm proposed appointing special counsel to oversee issues related to specific debts between the petitioners. 82 ThejudgeinAmduraheldthattheinter debtorissuesweretoointegraltotheoverall casetoallowspecialcounseltoremedytheconflict. 83 Thedebtorswererequiredtofindindividual counsel. 84 II. TheRulesinPractice Knowing what the rules are is the first step. Knowing how to meet their requirements is the second. And it s not always easy. As this section will describe, the level of conflict review and disclosure in larger cases can be somewhat daunting. And, as recently occurred in Lyondell, you don tnecessarilyhavetorunafouloftherulesatalltohavetheissuebecomeaproblem. a) TheConflictsAffidavit Forbigbankruptcycases,2009wasaboomyear.Companieswithassetsthatnumberedinthe tens of billions filed one after the other. And any such enterprise will necessarily have a large numberofrelationships.thefirmsthatseektorepresentthesedebtorsinbankruptcyareforcedto analyzeeachoneoftherelationshipstodeterminewhetherapotentialconflictexists.theresulting disclosurecanbevoluminous. Take General Motors, which had $91 billion in reported assets when it filed for bankruptcy protection. In preparing its conflict disclosure affidavit, General Motor s Counsel, Weil Gotshal & Manges,compiledalistofalltheentitiesthatwerelikelytohavearelationshipwiththedebtor. 85 It thencrosscheckedthislistofcreditors,suppliers,dealers,insurers,professionalserviceproviders andinsiderswithitsowncurrentclientandpastclientdatabase. 86 Thefirmalsoreachedouttoall employees to inquire whether any personal relationships between Weil Gotshal staff and General Motorsemployeesexisted. 87 Anymatchesthatcameupweredisclosedindetailtothecourt. 88 Weil Gotshal detailed not only current and former client matches, but also provided a list of potential matches between General Motors relationships and firm relationships. 89 The list of potential conflictsnumbered246relationships. 90 Potential conflicts in big cases that run into the hundreds are common. In the Chrysler bankruptcy,jonesdaysubmittedanaffidavitthatdisclosed196potentialconflicts. 91 IntheTribune 80Id. 81Id. 82Id. 83Id. 84SeeInreAmduraCorp.,121B.R SeeApplicationoftheDebtorsPursuantto11U.S.C. 327(a)and328(a)andFed.R.Bankr.P.2014(a)ForAuthorityto Employ Weil, Gotshal & Manges LLP as Attorneys for the Debtors, Nunc Pro Tunc to the Commencement Date (Jun. 12, 2009), S.D.N.Y.( (REG)). 86Id. 87Id. 88Id. 89Id. 90Id. 91 Application of the Debtors in Possession, Pursuant to Sections 327(a), 328(a), 329(a) and 364 of the Bankruptcy Code, BankruptcyRules2014(a)and2016(b)andLocalBankruptcyRules2014 1and2016(b)andLocalBankruptcyRules2014 1and ,foranOrderAuthorizingThemtoRetainandEmployJonesDayasCounsel,NuncProTuncasofthePetitionDate(Apr.30, 2009),S.D.N.Y.( (AJG)). 516

9 Companybankruptcy,SidleyAustendisclosed259potentialconflicts. 92 InLehmanBrothers,Weil Gotshal disclosed 158 potential conflicts, including five current clients that each represented between 1.04% and 3.3% of the firm s revenue. 93 In the same case, Milbank, which sought to represent the Unsecured Creditor s Committee, disclosed 153 potential conflicts. 94 Bankruptcy courts evaluated all of these relationships. Each of these firms was permitted to represent their client despite the large number of potentially problematic associations. Clearly, the number of potentialconflictsisnotnecessarilytheproblem. b) ApplicationoftheRules One of the most controversial issues surrounding the Code s conflict rules is the extent to whichtheapplicationoftheserulesdiffersbetweenjudicialdistricts.thisdiscussionispartofan overall debate regarding debtor friendly districts and the obvious concentration of major bankruptcy cases in New York and Delaware. 95 While there are certainly local cultures in every judicial district (an in every courtroom), the extent to which some jurisdictions treat attorneys seekingtotakepartinabankruptcycasemoreharshlywhenitcomestoconflictsisunclear. 96 TakethecaseofJohnGellene,theNewYorkbankruptcylawyerwhowenttoprisonbecausehe couldn tmeetthestandardsofconflictrulesinawisconsinbankruptcycourt. 97 Thefamousquote fromthatepisodecamefromthewisconsinbankruptcyjudgedressingdownlawyerswhohadjust flowninfrommanhattan: NewYorkisdifferentfromMilwaukee Professionalthingslikeconflicts are taken very, very seriously. And for better or worse, you re stuck in Wisconsin. 98 What is discussed less often is the extent to which Gellene misled the court in attempting to cover up his failuretodiscloseaconflict. 99 Arguably,Gellenewouldhavefacedthesamepenaltyforrepeatedly lyingtoajudgehadhebeeninthesoutherndistrictofnewyork,delawareoranywhereelse. 100 Therefore,whiletherearecertainlygoodstoriesoutthere,theactualdifferencesbetweendistricts arehardertopindown. 101 AgeneralreviewofthecasesregardingtheCode sconflictprovisions,onecouldargue,reveals thatthereiscertainlyadiversityofopinionregardingtheapplicationofthesection327.but,atthe same time, there does not seem to be distinct divides between circuits or districts regarding that 92ApplicationforanOrderAuthorizingtheEmploymentandRetentionofSidleyAustenLLPasAttorneysfortheDebtorsand Debtors in Possession Pursuant to 11 U.S.C. 327(a) and 1107, Nunc Pro Tunc to the Petition Date,(Dec. 26, 2009), D. Del.( (KJC)). 93NoticeofDebtor sapplicationpursuanttosection327(a)and328(a)ofthebankruptcycodeforauthorizationtoemploy andretainweilgotshal&mangesllpasattorneysforthedebtors,nuncprotunctothecommencementdate,(oct.8,2008), S.D.N.Y.( (JMP)). 94ApplicationofOfficialCommitteeofUnsecuredCreditorsofLehmanBrothersHoldingsInc.,etal.,Under11U.S.C. 1103and Fed. R. Bankr. P and 5002, for Order Authorizing Retention and Employment of Milbank, Tweed, Hadley & McCoy LLP as Counsel,EffectiveasofSeptember17,2008,(Oct.21,2008),S.D.N.Y( (JMP)). 95Seee.g.LynnLoPucki&SaraD.Kalin,TheFailureofPublicCompanyBankruptciesinDelawareandNewYork:Empirical EvidenceofaRacetotheBottom,54VAND.L.REV.231(March2001). 96Foradiscussionoflocallegalculture,seeTeresaSullivan,ElizabethWarren&JayWestbrook,ThePersistenceofLocal LegalCulture:TwentyYearsofEvidencefromtheFederalBankruptcyCourts,17HARV.J.L.&PUB.POL Y801(1994). 97SeeMILTONREGAN,EATWHATYOUKILL:THEFALLOFAWALLSTREETLAWYER(2004). 98SeeStevenBiskupic,ACriminalProsecutionforViolatingBankruptcyRule2014:AStrongStandardorSimplyStrongProof?, 9J.BANKR.L.&PRAC.301(2000). 99Id. 100Id. 101 Unlike information regarding fees and plan confirmation, the data regarding different approaches to Code conflict doesn tseemtoexist.fordataonfeesandplanconfirmation,seelopucki&kalin,supranote

10 17th Annual Northeast Bankruptcy Conference application given that bankruptcy courts often take into account the totality of the circumstances involvingeachpotentialconflict. c) ThinkingAboutLyondell? The recent accusations made against debtor s counsel in the Lyondell case provide an interestingexampleoftheissuesthatbankruptcy sconflictsrulescancreate.inlyondell,debtor s counselfiledaconflictsaffidavitthatdisclosed123potentialproblematicrelationships. 102 Among theserelationships,thefirmsingledoutninebanksasrepresentingbetween1.14%and5.9%ofits revenue. 103 Among these clients was Merrill Lynch. The judge approved reviewed this disclosure andaffirmeddebtor scounsel sretentionasdebtor scounsel. InDecember2009,debtor scounselattorneysnegotiatedasettlementbetweenlyondelland severalbanksthathadhelpedfinancethemergeroflyondellandbaselafin Themerger had allegedly left Lyondell with an unmanageable amount of debt and had ultimately forced the company into bankruptcy. 105 Debtor s counsel had organized an agreement whereby the banks would pay the debtor s estate $300 million in exchange for dropping the suit. 106 Creditor s committee counsel, who represented Lyondell s Unsecured Creditor s Committee, thought the settlementtoolittle. 107 Creditor scounselclaimedthatdebtor scounsel srelationshipwithmerrill Lynch, one of the banks agreeing to settle with Lyondell s bankruptcy estate, prevented the firm fromproperlyrepresentingtheinterestsoflyondell screditors. 108 Creditor s counsel asserted that debtor s counsel had failed to fully disclose its conflicts with Merrill Lynch. 109 Creditor s counsel claimed, among other allegations, that debtor s counsel had failed to disclose to the Creditor s Committee that it was presiding over the litigation with the banks. 110 Creditor scounselstatedthatthecreditorscommitteehadbeenledtobelievethatspecial counsel had been appointed to oversee the litigation, when in fact debtor s counsel was handling the matter alone. 111 Creditor s counsel stated that it would have raised objection to the conflict earlier if disclosure of debtor s counsel s role had been made before the settlement was announced. 112 In its defense, debtor s counsel claimed that the creditor s committee was using the conflict claimasamerelitigationtactic. 113 Thedebtor sattorneysarguedthattheyhadfullydisclosedtheir relationship with the banks, as well as their role in the negotiating the settlement. 114 Finally, debtor s counsel stated that no objection to its potential conflicts had been raised when it sought retentionasdebtor scounselorwhenitbegantoprosecutethedebtor sclaimagainstthebanks ApplicationforanOrderAuthorizingtheEmploymentandRetentionofCadwaladerWickersham&TaftLLPasAttorneys forthedebtors(feb.5,2009),inrelyondellchemicalco.,s.d.n.y(no ). 103Id.at Baxter,supranote6. 105Id. 106Id. 107Id. 108Id. 109CorrectedObjectionoftheOfficialCommitteeofUnsecuredCreditorstoDebtors MotiontoApproveSettlementAgreement withfinancingpartydefendantsincommitteelitigation(jan.29,2010),inrelyondellchemicalco.,s.d.n.y(no ). 110Id.at Id. 112Id. 113Debtor somnibusreplytoobjectionstothedebtor smotiontoapprovesettlementwithfinancingpartydefendantsin CommitteeLitigation(Feb.10,2010),InreLyondellChemicalCo.,S.D.N.Y(No ). 114Id.at Id. 518

11 The conflicts claim, debtor s counsel argued, represented nothing more than an attempt by the creditor scommitteetocontrolthedebtor sactions. 116 Days later, the banks agreed to increase the settlement amount to $450 million and the Creditor scommitteewithdrewitsobjection. 117 ReutersquotedoneCreditor scommitteeattorney asstatingthathehopedthesettlementwouldusherinaneweraofcooperationamongpreviously warringparties. 118 Whilewewillneverknowwhichsideofthisargumentwasright,itisclearthatallegationofan attorney s conflict of interest is an effective litigation tool in bankruptcy. Moreover, it seems that robustdisclosuremaynotnecessarilyinsulateafirmfromaccusationsofbeingconflicted.itseems a firm must rely on its good judgment and the certainty that comes with knowing that it has disclosed every relationship that could conceivably give rise to an adverse interest. Arguably debtor scounsel sbestdefensewasthattherewasnorelationshipthatithadnotdisclosedtothe court. However, the extent of the interweaving relationships among the major law firms in the UnitedStatesshouldprovideanadditionalsourceofcomforttocounselonanysideofabankruptcy case. After all, debtor s counsel disclosed 123 potentially problematic relationships. Creditor s counsel disclosed Much of the difference comes down to how each firm classified its potentially problematic relationship. Still, it is clear that the problem with insolvency practice is everyonehasrelationshipswitheveryone. III.Conclusion There is bramble of case law interpreting the Code s language as it pertains to conflicts. CourtshavetakendifferentapproachesinapplyingtherequirementsofSection327andoftentimes a pragmatic application is taken in light of the multiplicity of parties in bankruptcy proceedings. Therequirementsexisttomakesureallattorneys tenderundividedloyaltyandprovideuntainted advice and assistance in furtherance of their responsibilities. 120 They screen for even the appearanceofimpropriety. 121 Askingwhetheranattorney srelationshipcreatesaconflictisnot sufficienttodeterminewhetherthatrelationshipwilllatercauseaproblem.thequestiontoaskis whethertherelationshiplooksasifitmightcreateaconflict.attorneysthatremembertodisclose everything,andthatareabletolookattheirrepresentationfromthepointofviewofathirdparty s smelltest,shouldbefine mostofthetime. 116Id. 117LyondellsettlementpaveswayforBankruptcyexit,REUTERS,Feb.22, Id. 119ApplicationforOrderAuthorizingtheRetentionofBrownRudnickLLPasRetentionasCounselfortheOfficialCommitteeof UnsecuredCreditors(Feb.6,2009),InreLyondellChemicalCo.,S.D.N.Y(No ). 120Romev.Braunstein,19F.3d54,58(1stCir.1994). 121InreElSanJuanHotelCorp.,239B.R.635,647(1 st Cir.BAP1999). 519