Content area
Full text
A GRAY AREA IN THE LAW? RECENT DEVELOPMENTS RELATING TO CONFLICTS OF INTEREST AND THE RETENTION OF ATTORNEYS IN BANKRUPTCY CASES*
I. INTRODUCTION
The existence of conflicts of interest impacts on the initial decision whether to approve the retention of attorneys in a bankruptcy case, and it provides cause to disqualify or deny fees to attorneys who have not disclosed the existence of conflicts. Courts are given considerable discretion in their decisions relating to sanctions for nondisclosure, and some weigh the equities where a disqualified attorney's services have benefitted the estate. The federal circuit courts of appeal take different approaches with respect to some questions, increasing uncertainty in this area of the law.
Nonetheless, based on our review of decisions addressing questions relating to conflicts of interest, we believe that there are two guiding principles that emerge from the case law. First and foremost, attorneys must at all times conduct themselves in accordance with their ethical obligations toward their clients. In the cases addressed here, the client will be a representative of the bankruptcy estate, rather than a debtor's shareholders, creditors, or other parties in interest.
Assuming that the vast majority of attorneys will not breach duties of loyalty to their clients, probably the most frequently encountered problem in the case law is the failure to disclose the existence of conflicts of interest. Admittedly, such disclosure can result in loss of a potentially lucrative engagement, but there is a much greater cost to the firm if sanctions are imposed and fees are disallowed after services have been rendered. The case law instructs that attorneys must be fully forthright in their disclosure of connections that may disqualify them.
We believe that proper disclosure can avoid many of the unfortunate situations addressed in the case law. This Article is intended to be used as a quick reference to current decisions, rather than to provide a studied analysis of the state of the law. It is divided into four areas, commencing with a discussion of the ethical and fiduciary obligations of court-appointed counsel. Later, separate sections summarize decisions relating to retention and compensation agreements, two areas where questions concerning conflicts of interest tend to arise. We have also inserted a discussion of the controversy concerning multidisciplinary practice,...