THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

1. Disqualification due to third party fee payments or guaranties reduces the likelihood that competent counsel can be retained in some Chapter 11 cases. The estate may be fully liened; Section 506(c) collateral surcharges may be limited by the court; counsel risks her initial case evaluation proving overly optimistic, but not being allowed to withdraw.
2. A security interest on the estate's unencumbered or under-encumbered assets to help assure fee payment may be allowed by some courts, after a thorough review of all the circumstances by the court. However, a prepetition retainer may not be effective in the event of conversion, at least in some courts.
3. A retainer may result in a disqualifying conflict of interest if it is obtained without authorization from a secured lender's cash collateral. A fee agreement providing that counsel may dismiss or convert the case if money is not regularly escrowed for fees causes a disqualifying potential adverse interest between lawyer and client. However, DIP counsel does not breach any ethical duty to the client by insisting on full payment of its administrative expense claim at plan confirmation.
4. A prepetition agreement to pay a flat fee for prepetition work in installments has been held to create a conflict of interest in an individual bankruptcy case. While installment arrangements do not per se create a conflict, upon the petition filing the attorney becomes a self-interested creditor in conflict with the debtor client who is seeking discharge of prepetition obligations. Contractual remedies for nonpayment of installments

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