THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

I. Sources of Applicable Law.

1. Attorneys confront ethical issues and problems daily in all aspects of their practice. Ethical guidance for all attorneys may be found in the 1969 ABA Model Code of Professional Responsibility and the 1983 ABA Model Rules of Professional Conduct. A variation of one of those standards is applicable in every state. In addition to court opinions, ABA Ethics Opinions are published, as are state bar rulings, and sometimes county and city bar rulings. Bankruptcy counsel, like other attorneys, are bound by these ethical standards and interpretations. Bankruptcy courts in particular have found that state codes or rules of professional ethics apply in bankruptcy cases, and are relevant to attorney disqualification.¹ The ethical rules for the district in which the bankruptcy case is pending generally govern lawyers admitted pro hac vice in that case, or otherwise appearing.²
2. Many lawyers find the relevant ethical guidelines difficult to understand and apply, even when counseling and litigating on behalf of only one client. Problems increase for counsel for a debtor-in-possession ("DIP") or trustee, since those clients bear responsibilities to other entities and people as well. They are fiduciaries to the bankruptcy estate, perform duties for the benefit of creditors, and operate only with restraint.³
3. While the ethical duties of counsel for a debtor in possession ("DIP") or committee, or any other client, run primarily to the client, and emphasize loyalty and sound representation to the client,⁴ loyal and responsible service must be performed in the context of the client's rights and duties. And, such service cannot transgress ethical rules of fair and honest dealing with third parties, including the court and opposing counsel.⁵ Given the fiduciary duties of the DIP and committee members to creditors, and the conflicts that result when the interests of creditors in general differ from self-interest, counsel in many cases has a difficult time counselling as well as advocating. Courts holding that counsel has her own fiduciary duties to the general creditors, apart from and sometimes conflicting with duties to her client, exacerbate the difficulty, and intensify the need to understand bankruptcy fiduciary duties, as described more fully below.⁶
4. Counsel for the DIP and for the debtor in chapter 7 and chapter 13 cases must also abide by a number of Bankruptcy Code provisions with ethical connotations, including those requiring disclosures of compensation arrangements, with DIP and trustee counsel also obliged to comply with disinterestedness requirements.⁷ Bankruptcy Rule 9011 now provides that counsel's "filing" or "later advocating" any paper in a case is a certification that to the best of the attorney's knowledge, information, and belief formed after a reasonable inquiry, it is not presented for delay or any other improper purpose, is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and either has evidentiary nonfrivolous support or is likely to be so supported after reasonable discovery. Local Bankruptcy Rules may well have similar ethical components.⁸