SERVICE TO THE ESTATE AND ETHICS
PROPOSAL #4: CONFLICT OF INTEREST
Background
Under 11 U.S.C. § 327(a), the trustee or debtor in possession, with court approval,
may retain professional persons that are disinterested and "that do not hold or represent an
interest adverse to the estate". This adverse interest provision is similar to the conflict
provision contained in former Bankruptcy Rule 215(a). "Adverse interest" is not
defined in the Bankruptcy Code.
Proposal
The Bankruptcy Code should define conflict of interest for purposes of retention of
professionals under section 327. A professional has a conflict of interest if there is a
substantial risk that such professional’s representation will be materially
and adversely affected by the professional’s own interests or by the
professional’s duties to another person that currently employs or formerly
employed such professional or a third person.
Reasons for the Change
The Bankruptcy Code does not provide a standard to evaluate conflict of interest. Without
specific statutory guidance, courts have grappled with the question of whether a professional
holds or represents an interest adverse to the estate. In order to avoid a draconian per se
rule on the issue of conflict of interest, some courts distinguish between "potential"
and "actual" conflict of interest in deciding whether the professional should be
retained or compensated. [ FN: See, e.g., In
re Harold & Williams Development Co. , 977 F.2d 906, 911 (4th Cir. 1992) (overruling
bankruptcy court decision disqualifying professional from serving as both attorney and
accountant; a more fact-specific inquiry was required to determine whether "the foreseeable legal
and accounting tasks present [an] inherent conflict or potential breach of
confidence. "); In re BH&P Inc. , 949 F.2d 1300, 1313 (3d Cir. 1991) (rejecting per se
rule in trustee disqualification case; evaluation should be done on a case by case basis); In
re Martin , 817 F.2d 175 (1st Cir. 1987) (existence of potential for conflict of interest does
not preclude retention of counsel; retention is only voidable as facts may warrant); In re
Seminole Oil & Gas Corp. , 1992 WL 110720 (4th Cir.) (refusing to disqualify debtor
’s counsel due to prior representation of debtor ’s directors; without existence of
actual conflict of interest, disqualification was not warranted).] This
quasi-distinction has led to a variety of standards as to when a conflict of interest actually exists.
The "materially and adversely" language in the proposed standard is taken from
the current definition of "disinterestedness" in 11 U.S.C. § 101(14)(E). Section
101(14)(E) requires, among other things, that a professional "does not have an interest
materially adverse to the estate ... by reason of any direct or indirect relationship to, connection
with, or interest in, the debtor". The proposed language is also consistent with the conflict
of interest definition in section 201 of the current draft of the American Law Institute’s
Restatement of the Law Governing Lawyers.
As long as the focus of any conflict standard is on the significance of the connection
orrelationship, it will be able to address virtually all of the conflict issues that may arise (including
so called "potential" conflicts).
Competing Considerations
It may be argued that even in the absence of statutory guidance, courts are moving away from
a per se rule and towards a fact-based inquiry on the subject of conflict of interest.
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