57 RI Bar J., No. 5, Pg. 5. Receivers, Ethics, Conflicts and Confidentiality.

• Author: Thomas W. Lyons, Esq.Rhode Island Bar Association Past President and partner in Strauss, Factor, Laing & Lyons, Providence

Rhode Island Bar Journal

Volume 57.

57 RI Bar J., No. 5, Pg. 5.

Receivers, Ethics, Conflicts and Confidentiality

Rhode Island Bar Journal57 RI Bar J., No. 5, Pg. 5 March/April 2009 Receivers, Ethics, Conflicts and ConfidentialityThomas W. Lyons, Esq.Rhode Island Bar Association Past President and partner in Strauss, Factor, Laing & Lyons, Providence Every year, lawyers file approximately 100-150 receiverships in Rhode Island Superior Court, meaning that, every year, the Superior Court justices appoint that many receivers. The receiver can have great powers and duties, subject to the supervision of the Court, including: the power to take possession of all assets of the estate in receivership; the power to abandon or sell property of the estate; the power to operate the estate as a business or to liquidate it; the power to prosecute and settle claims on behalf of the estate; the power to make recommendations to the court on granting or denying creditors' claims against the estate; and the ability to have his or her fees paid from the assets of the estate.(fn1) Receiverships may involve hundreds of thousands or millions of dollars of assets and liabilities. It is critical that the receiver be both capable and impartial.

Typically, the petition to appoint a receiver does not request a particular person be appointed. Instead, the petitioner orally suggests one or more candidates at the initial hearing or conference with the court. The appointments are made from a list of 55 Court-approved receivers who are in about 40 firms or solo practices. What happens thereafter depends on the individual judge hearing the petition. Often, there is no representation on the record that the proposed receiver has no conflicts of interest, nor do many courts demand that showing nor is the proposed receiver required to disclose whether he or his firm represent any of the parties to the receivership in any capacity. As of the time this article was written, it was rare, if ever, that the creditors were informed if the receiver or his firm represents the debtor or one of the other creditors/claimants in other matters.

This situation occasionally presents at least the appearance of a conflict or other possible impropriety as when the receiver's law firm lists a major creditor in the receivership as a "representative client" on its website. This raises the question of what ethical rules, if any, govern the appointment and conduct of receivers? Specifically, is a lawyer acting as a receiver governed by the Rules of Professional Conduct, The Code of Judicial Conduct, both sets of ethical rules, or no ethical rules at all? This is an important question, as the employment of a receiver with conflicts of interest arguably violates due process.(fn2)

Depending on whom you ask, you will get a variety of responses, including some combination of the four possible answers.(fn3) Our Supreme Court has already recognized that receivers may have impermissible conflicts of interest, although it did not indicate under what code or standard the conflict is analyzed and resolved. In In re Advisory Opinion to the Governor (DEPCO),(fn4) the Court commented: "Ordinarily, only a person who is without interest in a cause and who stands indifferent between the parties may be appointed a receiver."(fn5) The Court said: "[T]he Superior Court retains the authority to cure any actual conflict by removing and replacing the director [of the Department of Business Regulation] as receiver or by appointing a coreceiver to prosecute or defend the claim." Indeed, federal courts have held that even the Federal Deposit Insurance Corporation can be accused of a conflict of interest when it acts as the receiver of a failed bank.(fn6)

This article presents the arguments for all four answers listed above and concludes that, under existing law, an attorney acting as a receiver is governed by both the Rules of Professional Conduct and the Code of Judicial Conduct. The upshot of this conclusion is that attorney-receivers are governed by the same rules respecting conflicts of interest and appearances of impropriety that govern judges as well as lawyers acting in any other legal capacity. This conclusion may have some significant repercussions in Rhode Island practice given the relatively small number of lawyers who act as receivers.

Superior Court Rule 66 addresses the appointment and conduct of receivers. However, it provides no guidance on this issue (unless the absence of guidance is some indication itself). The Reporter's Notes state: "This rule departs from the Federal rule and essentially follows the practice under Superior Court Rule 96."(fn7) The Note then mentions some exceptions to this statement, none of which seem to bear on the ethics issue.

The Rhode Island Rules of Professional Conduct do not expressly address whether they apply to a lawyer acting as a receiver. However, Paragraph (3) of the "Preamble and Scope" of the Rules states that:

a lawyer may serve as a third-party neutral, a nonrepresentational role helping the parties to resolve a dispute or other matter. Some of these Rules apply directly to lawyers who are or have served as third-party neutrals. See, e.g., Rules 1.12 and 2.4. In addition, there are Rules that apply to lawyers who are not active in the practice of law or to practicing lawyers even when they are acting in a nonprofessional capacity. For example, a lawyer who commits fraud in the conduct of a business is subject to discipline for engaging in conduct involving dishonesty, fraud, deceit or misrepresentation. See Rule 8.4. (emphasis added)

Paragraph (5) of the "Preamble and Scope" notes:

A lawyer's conduct should conform to the requirements of the law, both in professional service to clients and in the lawyer's business and personal affairs. . ..While it is a lawyer's duty, when necessary, to challenge the rectitude of official action, it is also a lawyer's duty to uphold legal process.

Rule 1.12(a), "Former Judge, Arbitrator, Mediator or Other Third-Party Neutral," sets forth:

Except as stated in paragraph (d), a lawyer shall not represent anyone in connection with a matter in which the lawyer participated personally and substantially as a judge or other adjudicative officer or law clerk to such a person or as an arbitrator, mediator or other third-party neutral, unless all parties to the proceeding give informed consent, confirmed in writing.

The Comments to Rule 1.12 state:

The term "adjudicative officer" includes such officials as judges pro tempore, referees, special masters, hearing officers and other parajudicial officers, and also lawyers who serve as part-time judges. Application Canons C(2), D(2), and E(2) of the Code of Judicial Conduct provide that a continuing part-time judge, periodic part-time judge or judge pro tempore may not "act as a lawyer in any proceeding in which he served as a judge or in any other proceeding related thereto."

Thus, the Rules seem to apply to lawyers even when they are not acting on behalf of a client in their private practice. This also includes when they are acting as a receiver, as that role is at least arguably a "parajudicial officer," "conduct[ing] a business," or, to some extent, perhaps, a "third-party neutral." Notably, the Rhode Island Supreme Court requires that court-appointed receivers be admitted to practice in Rhode Island for at least five years.(fn8) This seems to be a strong indication that the Court expects receivers to abide by the Rules of Professional Conduct.

The Rhode Island Supreme Court Ethics Advisory Panel has applied the conflict of interest provisions of the Rules of Professional Conduct to a practicing lawyer who was also a part-time municipal court judge. In Opinion No. 2003-03,(fn9) the Panel said an attorney employed as a part-time municipal judge and his firm have a conflict of interest in representing clients in property revaluation contests with the municipality even where the municipal court has no role in the contests. Under Rule of Professional Conduct 1.7(b), before the attorney's firm can represent clients in such contests the firm's lawyers must reasonably believe that their representations of the municipality and the other clients will not be adversely affected and all the clients must consent after full disclosure.

Our state courts have held that a receiver has fiduciary duties to the creditors.(fn10) Other courts have held that receivers have fiduciary duties to the court and to the estate.(fn11) In other words, the receiver may be a fiduciary for the court, for the receivership estate and for the creditors. Numerous courts elsewhere have held that a violation of fiduciary obligations by an attorney can also constitute a violation of the Rules of Professional Conduct.(fn12) Moreover, the Rules may establish an attorney's standards of fiduciary obligation.(fn13)

A receiver is analogous to an interim trustee in bankruptcy. Conflicts of interest in bankruptcy matters are generally governed by a statute that requires a showing of an "actual" conflict, not just a "potential" conflict or the "appearance" of a conflict.(fn14) Most of the cases interpreting this provision do so in the context of an alleged conflict of a lawyer or law firm employed by the interim trustee for some specific purpose.(fn15) There are few cases analyzing the trustee's or interim trustee's alleged...