Chapter 16 The Role of the Lawyer
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Chapter 16 The Role of the Lawyer
§ 16.1 ~ Looking Yourself in the Mirror
The sensible lawyer will concern herself with issues of professional responsibility (PR), if not as a matter of self-respect, then at least as a matter of common prudence. Surely, she wants to be able to look herself in the mirror in the morning. But in any event, she wants to avoid having her fees disallowed or being sued for malpractice, or disbarred, or prosecuted for a crime.1 All of these concerns keep PR issues on the front burner.
In some sense, issues of professional responsibility are no different in bankruptcy than elsewhere in the practice of law. The lawyer is both an advocate and an officer of the court. The structure and substance of the bankruptcy case serve to give these issues a special twist for bankruptcy lawyers.
§ 16.2 ~ structure
First, as to structure, all lawyers are bound by the rules governing lawyer PR in any case, but issues of bankruptcy PR are most likely to arise when the lawyer is acting on the authorization of the court — as counsel to the DIP, to the trustee or to a committee.2 For these cases, the Code sets specific standards for employment and retention, and the court maintains close control of fees, providing a framework bound to generate PR issues.3
Second, as to substance, most conventional litigation is a two-party affair, while bankruptcy, almost by definition, involves multiple parties4 — and not only multiple parties, but also parties with shifting alliances, so that today's enemy becomes tomorrow's friend. Here is a simple example: The creditor is adverse to the debtor on the basic question of the collection of the debt. But any single creditor may be an ally of the debtor in seeking to protect the debtor's bankruptcy discharge — provided that the claim of the individual creditor will survive free of competition from other adverse claims. In the same vein, creditors may work happily together — and with the debtor — to gang up on another creditor in an action to avoid a preference. Parties who are at loggerheads over an underlying liability may, nonetheless, find themselves constrained to work together in formulating a plan. All of these concerns sometimes blur the distinctions that govern ordinary rules of client loyalty.
Another problem of substance, which we discuss in Chapter 6, is that we do not have a consensus as to just how far the DIP in chapter 11 can "tilt to equity." Is the DIP solely the agent of creditors, or may it seek to salvage something for the old residuary owners, even if it is at the creditors' expense? This is a problem in any event. It becomes a PR problem because the question of what the lawyer can do is governed in large part by the question of what the client can do. If the client is permitted to tilt to equity, then there can be no problem in the lawyer's helping it to do so, but if the client is constrained, then the lawyer may be constrained as well.
Within this framework, it is possible to sketch the layout of the playing field. In most of our discussion below, we will focus on the role of the attorney who represents a DIP, because that is where many of the problems come up and the cases get written. But most of what we say here would apply to any "professional person" — accountant, etc. — working for a trustee, including a DIP. And a good bit of it also applies to an attorney representing a committee.
§ 16.3 ~ Employment
Section 327(a) provides that "the trustee, with the court's approval, may employ one or more attorneys [etc.] that do not hold or represent an interest adverse to the estate and that are disinterested persons...."5 Therefore, the point of departure is that you do not get paid unless your employment is authorized and you meet specific threshold criteria.6 We discuss the criteria briefly, then say a word about the employment process.
§ 16.4 ~ Form Application for Employment
In re: INSOLVENT SUPPLY CORPORATION, Debtor-in-Possession
Case No. 14-1324
(Chapter 11)
Insolvent Supply Corporation (the "Debtor") respectfully requests this Court's approval of the employment of Smith & Jones, LLP as attorneys for the Debtor and Debtor-in-Possession, pursuant to 11 U.S.C. Sections §§ 327, 328 and 1107 and Rule 2014 of the Federal Rules of Bankruptcy Procedure, on the following grounds:
A. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334.
B. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
C. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
A. On December 22, 2014, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. No trustee, examiner, or committee of creditors has been appointed in this case. The Debtor continues to own and manage its property and to conduct its business affairs as a debtor-in-possession.
B. The Debtor desires to retain counsel to assist it in the performance of its duties in this case. The professional services for which the Debtor desires to employ counsel include, but are not limited to, legal services as may be required or deemed by the Debtor to be desirable in connection with the administration of this case in accordance with the powers and duties of a debtor-in-possession as set forth in the Bankruptcy Code and applicable bankruptcy law, representing the Debtor in connection with all motions, other contested matters and adversary proceedings that may arise in connection with the case, and advising and representing the Debtor in connection with the formulation and confirmation of a chapter 11 plan.
C. The Debtor has selected Smith & Jones because Smith & Jones has considerable experience and knowledge in bankruptcy and related matters. The Debtor believes that the applicant is well-qualified and able to represent the Debtor in this case in an efficient and timely manner.
D. Smith & Jones has stated its desire and willingness to act in this case and to render the necessary professional services as counsel to the Debtor.
E. To the best of the Debtor's knowledge, Smith & Jones represents no other entity in connection with this case, is a disinterested person, as that term is defined in § 101(14) of the Bankruptcy Code, and represents or holds no interest adverse to the Debtor, creditors, any party in interest, their respective attorneys or accountants, the United States Trustee, or any person employed in the office of the United States Trustee, except as disclosed in the Verified Statement of Albert E. Smith Pursuant to Bankruptcy Rule 2014 (the "Verified Statement"), as that Verified Statement may be amended from time to time. A copy of the Verified Statement is attached to this Application as Exhibit A.
F. Smith & Jones shall make appropriate applications to this Court for compensation of attorneys' fees and reimbursement of expenses as required by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. Subject to the Court's approval, Smith & Jones will perform all services at its customary hourly rates as those rates are in effect during the applicable time period for the principals, associates, and paralegals who render services on the Debtor's behalf. A copy of Smith & Jones' engagement letter, which includes the firm's current customary hourly rates, is attached hereto as Exhibit B and is incorporated herein by reference.
G. Smith & Jones reserves the right, subject to applicable law, to request additional fees based on the results obtained in this case, the degree of urgency required of counsel, and other factors relevant to the determination of fair and reasonable compensation.
H. No previous application for the relief sought herein has been made to this or any other court.
WHEREFORE, Insolvent Supply Corporation respectfully requests that an Order be entered authorizing and approving the employment of Smith & Jones as counsel to the Debtor and for such other and further relief as is just and proper.
Respectfully submitted,
INSOLVENT SUPPLY CORPORATION
By: __________
Irving Insolvent, President
88 Fluid Drive
New Vision, Utopia 99989
(111) 234-5678
Presented by:
SMITH & JONES, LLP
By: __________
Nathan Lee Kesef, Esq.
8381 Recovery Road
Utopia City, Utopia 98899
(646) 814-8114
§ 16.5 ~ Adverse interest and disinterestedness
As noted above, § 327(a) imposes two constraints on professionals: "adverse interest" and "disinterestedness." We'll address them in order.
§ 16.6 ~ Adverse interest: what is it?
First, the rule on adverse interest bears a strong family resemblance to the rule governing simple conflicts in any other field of law. Typically, the same counsel cannot represent both creditor and debtor in the same bankruptcy case any more than the same counsel can represent both victim and insurer in a personal-injury lawsuit.7
The difficulty is that questions of adverse interest aren't so easily cubbyholed. Suppose your firm represents BankCo, a major bank in your town with claims against a thousand debtors including DebtorCo. It happens that all BankCo work concerning DebtorCo has been handled by another firm. Can you represent DebtorCo as DIP in its chapter 11?8
The objection is obvious. The Model Rule says that the lawyer shall not represent the client if the representation will be directly adverse to or materially limited by the lawyer's responsibilities to another client unless, inter alia, the lawyer reasonably believes that there will be no adverse effect.9 This is a promising start, but it is too abstract to be conclusive. Is the bank "directly adverse" to the debtor? What will count as an adverse effect? All of this would seem to be open to case law articulation, which, surprisingly or not, remains thin.10
Even if we did know the answer, the question would remain: How far does the rule extend? Suppose BankCo...
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