THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

G. Effectiveness of Curative Measures.

1. Bankruptcy courts have often imputed disqualification of a single attorney in a firm to the entire firm, applying the imputed knowledge principle of professional responsibility rules, generally without analysis. More recent well-reasoned decisions, however, conclude that disqualification should not be imputed to the entire firm if a lawyer is deemed not disinterested for nonconflict reasons, such as prior service as a director or officer of the debtor. Screening of a lawyer who advised a former client creditor through implementation of a "Chinese Wall" may also suffice to waive any conflict disqualification. However, the Delaware Bankruptcy Court has refused to allow such creative measures, in part because in light of the current climate of distrusting officers and directors, it is entirely possible that all officers of the debtor may be at least interrogated, and the firm would be placed in an untenable position of deciding to question one of the partners.
2. Several courts have allowed counsel to overcome disinterestedness concerns and represent a DIP if curative measures are taken to resolve nondisinterestedness status after full disclosure, such as such as sale of shares in the DIP company or resignation from the board of directors or an officership of the company and recusal from board deliberations, ceasing to represent an affiliated party, or returning possibly preferential fee payments. Appointment of special counsel to deal with conflictrelated claims may suffice. Other courts have such actions unavailing.

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