THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

D. Fee-Related Disqualification.

1. Payment of fees by third parties is expressly sanctioned by the Model Rules of Professional Conduct, as long as client consent is obtained, client confidentiality protected, and no interference is imposed on the lawyer's independent professional judgment or lawyer-client relationship. Payment to a lawyer by a third party is not uncommon, with payments frequently being made by insurance carriers, prepaid legal plans, employers and parents.
2. Several courts have recognized that fee payment from sources other than the debtor may subject counsel to the temptation of furthering the payor's interests and deviating from the duty of undivided loyalty to the real client.
3. Some courts have allowed the DIP's partners or shareholders to protect their investment by individually paying or guaranteeing the DIP's attorneys' fees, even if the related entity is also a creditor. But one court has stricken such guarantees from fee agreements. Other courts have terminated counsel's representation because of the appearance of conflict and potential for conflict when the motives of the retainer payor are suspect in light of creditor status and other entanglements with the estate. Some courts flatly held that any fee payment by a third party is an actual conflict of interest disqualifying a professional from employment "absent a showing that the interests of the third party and the bankruptcy estate are identical" upon notice to all parties.