Ethical Conflicts in the Bankruptcy Context

I. Introduction: Ethical Conflicts in the Bankruptcy Context

II. Representation of Debtors

Disclosure

In General

Pursuant to Bankruptcy Rule 2014(a), all applicants for employment as a professional by the trustee or debtor in possession ("DIP") must state, to the best of their knowledge, all connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, and all employees in the United States trustee's office. Attorneys also have a general obligation, as officers of the court, to disclose all significant connections with the case. See In re Kendavis Industries Int'l., 91 B.R. 742, 748 (Bankr. N.D. Tex. 1988).

Disclosure is an ongoing responsibility. Actual or potential conflicts that arise after the initial application and disclosure should be promptly disclosed to the court. In re Sauer, 191 B.R. 402 (Bankr. Neb. 1995).

It is not for the DIP or its counsel to determine whether a connection is relevant. The court is to review all connections and decide whether there are any disqualifying conflicts. Halbert v. Yousif, 225 B.R. 336, 351 (Bankr. E.D. Mich. 1998); In re Arlan's Department Stores, 615 F.2d 925 (2d Cir. 1979).

Furthermore, courts may sua sponte inquire into apparent conflicts of interest. 11 U.S.C. § 105(a). Should the court find that an adversity is present, especially where counsel failed to disclose it, the sanctions imposed on counsel can be significant. In re Ochoa, 74 B.R. 191 (N.D. N.Y. 1987). See generally In re TMA Associates, Ltd., 21 B.C.D. 1569 (Bankr. D. Colo. 1991); In re Vanderbilt Associates, Ltd., 111 B.R. 347 (Bankr. D. Utah 1990), rev'd on other grounds, 117 B.R. 678 (D. Utah 1990); In re Anver Corp., 44 B.R. 615 (Bankr. D. Mass. 1984); In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. (1998).