THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

counsel's fiduciary duties to the estate. Advocating a sale agreement with a "no shop" clause instead of seeking or entertaining other offers to maximize the estate's value, especially if the clause is not disclosed, violates fiduciary duties. Even continuing with a stagnant reorganization once it should be clear no plan can be confirmed may be sanctionable. Counsel also should not proceed with litigation where the likely recovery will be less than the litigation cost, or file a plan that counsel knows is unconfirmable, at least without highlighting plan provisions that appear to bypass Code requirements. Disclosure to the court of diverging interests between insiders and the DIP entity may significantly alleviate conflict concerns, since other parties could then knowingly argue for contrary treatment.

1. Rather than carrying out client directions exceeding good faith boundaries, the DIP's attorney has ethical obligations to counsel his DIP client with respect to its fiduciary duties. As stated in the comment to Model Rule of Professional Conduct 1.6, "The lawyer is part of a judicial system charged with upholding the law. One of the lawyer's functions is to advise clients so that they avoid any violation of the law in the proper exercise of their rights."
2. If the operating head of the DIP entity fails to act in compliance with the DIP's fiduciary responsibilities, the lawyer may have to refer the matter higher up the chain of command to the chief executive officer or board of directors. The lawyer is to consider the seriousness of any illegality and its consequences in deciding what to do within the

This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)