The Need for Uniform Bankruptcy Legal Ethics Provisions
by Shane Johnson
University of Texas School of Law; Austin, Texas
Editor's note: The ABI National Ethics Task Force was formed by ABI President Geoff Berman and 2011. The mission of the Task Force is to consider ethics issues in bankruptcy practice and make recommendations for uniform standards where appropriate.
Courts have struggled to develop consistent case law for attorney representations of a debtor in possession (DIP) because of the DIP’s unique status within bankruptcy law. In particular, courts have held the DIP’s counsel acts for the benefit of itself, equityholders and creditors because the attorney represents the client’s bankrupt estate and not the client in its individual capacity.
In fact, representation of the DIP—with its multiple duties to different bankruptcy participants—seems to conflict with Rule 1.7(b)(3) of the Model Rules of Professional Conduct, which prohibits representation involving “assertion of a claim by one client against another client represented by the lawyer in the same litigation.” Although the DIP’s attorney only represents one party in bankruptcy, its duties to other parties may be seen as creating the same essential problem Rule 1.7(b)(3) seeks to prevent.
Another problem occurs when a firm represents multiple parties in the same bankruptcy case, even though § 327 of the Bankruptcy Code includes “one or more attorneys” and multiple representations of creditors is not a per se conflict. Unlike the cases where a firm represents one company for one transaction/case, and then represents an opposing party in another transaction/case, representation of multiple parties within the same bankruptcy proceeding would place a firm in situations where its two clients’ interests may not always align.
As one example of how courts have reached different rulings, the U.S. Bankruptcy Court for the Southern District of New York allowed multi-debtor representation by attorneys when a potential conflict existed, taking a wait-and-see approach to determine if disqualification would be necessary. Despite this ruling, the court recently held, at least somewhat to the contrary, that disqualification is appropriate if the representation of another client may cause the debtor’s attorney to act differently.
Even within the same federal district and with both courts citing previous Second Circuit Court of Appeals cases, discrepancies exist as to what constitutes an adverse interest concerning representation of multiple parties. To make the analysis even more difficult, the New York courts also looked to the New York state disciplinary rules, which provide that an attorney “may not ‘continue multiple employment’ if it is likely to ‘adversely affect’ his or her ‘professional judgment on behalf of a client.’” Since the disciplinary rules are not binding, courts have discretion as to how much weight to give them, especially in the bankruptcy context. Courts in other states have also reached different conclusions as to when the court should disqualify an attorney who represents multiple parties.
Uniform Bankruptcy Legal Ethics Provisions
Uniform federal legal ethics provisions for bankruptcy cases would lessen some of the complexity and ambiguity concerning bankruptcy legal ethics problems such as courts imposing different standards for multiparty representations because individual states’ codes do not adequately resolve these issues.
The Model Rules, as currently drafted, are not sufficiently tailored to address the various oddities of bankruptcy litigation, most notably the shifting alliances between parties. The current system, which applies the Bankruptcy Code in concert with state professional rules of responsibility, simply muddies the waters. In addition, as discussed,courts across the country differ as to what constitutes a violation or impermissible conflict under § 327(a), and a uniform body of rules would standardize procedures, ensuring that a debtor in Delaware receives the same representation as a debtor in Texas. However, the proposed ethics provisions would not completely ignore state’s codes, as many of their provisions apply to bankruptcies, but instead would supplement these codes with specific bankruptcy provisions to supersede any conflicting state provision.
Bankruptcy law is a federal body of law, and therefore a uniform body of rules would override individual states’ professional responsibility rules where they conflict. Other specialized attorneys, such as tax lawyers, lawyers who practice before the Securities and Exchange Commission (SEC) and military attorneys are subject to their own legal ethics regulations apart from individual state codes of ethics. The development of the separate provisions for tax and military practitioners arose because practitioners in those areas needed clarity as to which professional conduct rules applied to them. Bankruptcy law should follow their lead because the current system creates confusion, in part because of states’ slightly different professional responsibility regulations and interpretations of their ethics codes.
Even though the proposed provisions would address specific bankruptcy situations in a way a generalized code cannot, any uniform provisions would also encounter the same problems of interpreting the meaning of words such as “disinterested” and “adverse” that exists today. Therefore, the creation of a bankruptcy bar tribunal to interpret the new bankruptcy legal ethics provisions (in a similar manner to how state bars issue legal ethics opinions) would help with this problem, since their legal ethics opinions would apply to every bankruptcy court in the country.
Bankruptcy professionals would chair the bankruptcy tribunal, in the same way U.S. Trustees are chosen after working in the bankruptcy field. Attorneys and judges would be able to submit difficult ethics issues to the tribunal, which would then apply the new bankruptcy provisions and issue written opinions for future use by attorneys. Bankruptcy attorneys would then be able to rely on these opinions moving forward, providing clarity to the current landscape.
The provisions of the new bankruptcy ethics rules could also include notes or comments similar to those in the Bankruptcy Code, the Uniform Commercial Code and various other rules and codes, where the drafters could provide examples of what constitutes an ethics violation. For instance, the new provisions could address the ambiguous requirement that an attorney must be “disinterested” by offering examples in the notes from bankruptcy proceedings (such as the representation of the DIP or creditor’s committee) to show when an attorney is disinterested.
Advantages of Uniform Provisions
The first and most important advantage of a uniform system is not surprisingly, uniformity, meaning that across federal bankruptcy courts, the rules for attorneys would be the same. In addition to the uniform rules, the bar tribunal would provide interpretations of the new rules, clarifying any ambiguity in the provisions for attorneys nationwide. Uniformity would make any forum shopping based on the interpretation of ethics rules nonexistent, since the new provisions would essentially eliminate discrepancies across bankruptcy courts.
Closely related to uniformity is that bankruptcy provisions would provide more individualized rules to address particular bankruptcy problems. Under the current system, state legal ethics codes are general in nature because they must apply to a broad range of legal representations. However, rules specifically addressing bankruptcy issues (such as the representation of the DIP) would provide more guidance to bankruptcy practitioners. Additionally, the bar tribunal would address specific bankruptcy legal ethics issues occurring across the federal system, instead of individual state opinions that often do not address bankruptcy issues.
Bankruptcy provisions would also simplify the process of adhering to legal ethics codes by allowing attorneys to sort through one set of provisions for specific bankruptcy issues. States developed legal ethics codes to address litigation within their boundaries concerning their specific laws. A normal state litigation case must comply with the state’s ethics code, without the overlay of additional ethics codes. Bankruptcy proceedings do not fit as well within this framework, leading to different interpretations. Finally, the bankruptcy provisions would result in bankruptcy courts encountering fewer ethical problems because it would be clearer whether a violation occurred, as the comments to the bankruptcy provisions discussed a similar situation or the bankruptcy bar tribunal issued an opinion discussing the scenario.
1. 11 U.S.C. § 1107(a) (the DIP serves in a role similar to a trustee); 11 U.S.C. § 363.
2. See, e.g., In re Curry and Sorenson Inc., 57 B.R. 824, 828 (9th Cir. B.A.P. 1986); see also In re Bame, 251 B.R. 367, 373 (Bankr. D. Minn. 2000) (“While the exact scope of a DIP’s fiduciary duties is subject to some debate, it is clear that a DIP has a duty to creditors of the estate not to waste the estate’s assets”).
3. For one example of many where the court considered the interest of the estate, seeIn re Doors & More Inc., 126 B.R. 43, 45 (Bankr. E.D. Mich. 1991) (“[T]he Court must consider whether the selection [of the DIP’s counsel] is in the best interest of the estate.”); 11 U.S.C. § 1107(a).
4. Rule 1.7 Conflict of Interest: Current Clients, Ann. Mod. Rules Prof. Cond. Rule 1.7(b)(3).
5. 11 U.S.C. § 327(a).
6. 3 Collier on Bankruptcy § 327.04[b] (16th ed. rev. 2010).
7. See In re Adelphia Commc’ns Corp., 342 B.R. 122, 127 (S.D.N.Y. 2006).
8. See In re JMK Constr. Group Ltd., 441 B.R. 222, 230 (Bankr. S.D.N.Y. 2010).
9. Adelphia Commc’ns, 342 B.R. at 127 (citing22 N.Y. Comp. Codes R. & Regs. § 1200.24(b) (2005)).
10. In re 7677 E. Berry Ave. Assocs. LP, 419 B.R. 833, 842 (Bankr. D. Col. 2009) (holding key inquiry is whether counsel presently holds or represents interest adverse to estate); In re Rest. Dev. Group Inc., 402 B.R. 282, 289-93 (Bankr. N.D. Ill. 2009) (holding that no conflict of interest existed in case where attorneys represented debtor in its bankruptcy case and certain of debtor’s former principals and officers in as defendants in adversary proceeding because latter representation had developed for year before party objected and possible conflict of interest was not so obvious as to find that firm acted improperly).
11. See Linda S. Mullenix, “Multiforum Federal Practice: Ethics and Erie,” 9 Geo. J. Legal Ethics 89, 124-25 (1995) (“[I]t remains that modern ethical standards have only begun to address issues involved in multistate legal practice. Further, hardly any attention has been paid to the professional responsibility duties of federal practitioners.”).
12. See 31 C.F.R. §§ 10.1-10.93.
13. See Securities and Exchange Commission Standards of Professional Conduct for Attorneys, 1388 PLI/Corp 621.
15. See supra, n. 13 and 14.