THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

duty, and avoidance of fraudulent transfers when such a suit would be beneficial for the estate (albeit not the DIP management).⁵⁰ Waiver of all claims against a proposed DIP lender, without sufficient investigation, was also deemed not in accord with the DIP's fiduciary duties in one case,⁵¹ while another held that failure to collect receivables from an affiliate breached such duties.⁵² A debtor has a fiduciary duty to disclose all potential causes of action in its schedules.⁵³ Failure to disclose potential fraudulent transfer claims against insiders may be deemed a fraud on the court.⁵⁴

1. DIP management breaches its fiduciary duties by diverting business to a related non-debtor company.⁵⁵ Similarly, a DIP breaches its fiduciary duty by transferring value in excess of fair consideration to an insider through a "golden parachute" or debt forgiveness.⁵⁶ The duty of care also encompasses the duty not to dissipate assets by negligently continuing to operate and incur debts in a Chapter 11 when it is evident that no reorganization can succeed. Several courts have phrased their reasoning for decisions on appointing trustees in chapter 11 cases in terms of DIP breach of fiduciary duties to creditors.⁵⁷ Obviously, this duty also encompasses not stealing from estate accounts for unauthorized purposes.⁵⁸
2. DIP counsel may be sanctioned, at least through non-approval of fees, for allowing a DIP to breach its duty of care in the form of using bankruptcy court protection to incur further debt that cannot be paid.⁵⁹ The same is true when administrative expenses in the form of accruing attorneys' fees continue to be incurred in preparing a plan when the DIP's business is clearly deteriorating and there is no reasonable chance of an effective reorganization.⁶⁰ That reasoning has been held to preclude payment of fees in resisting conversion to chapter 7 after the DIP should have known reorganization was not a legitimate option, and use of estate assets to pay excessive executive compensation or non-estate obligations, such as attorneys' fees incurred in defending nondischargeability claims, and individual debtor living expenses.⁶¹ Counsel has also been sanctioned through fee disallowance for allowing a DIP to operate in chapter 11 for the sole purpose of paying down secured debt and tax obligations owed personally by the principals, when it was clear from the start that unsecured creditors would receive no dis