THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

I. Sanctions for Conflicts and Failure to Disclose Potential Bases for
Disqualification.

1. The most common consequence of non-disinterestedness is termination of the representation, with fee denial or disgorgement of interim payments, but suspension from practice, disbarment, and even criminal convictions have been imposed for blatant non-disclosure violations. The court may disqualify counsel from representing the DIP based upon an objective standard, evaluating the facts of each case, regardless of the integrity or intent of the attorney.
2. The Bankruptcy Code specifically authorizes--but does not require-- courts to deny fees and reimbursement of expenses if at any time during the employment, the attorney is not disinterested or holds or represents an interest adverse to the estate with respect to the matter for which the attorney is employed. If the attorney was never appointed as counsel, and is not disinterested or otherwise not enbtitled to nunc pro tunc employment, the court cannot award fees on grounds of quantum meruit, a substantial contribution to the case, or other equitable grounds. If the attorney was approved as counsel, and later found disqualified, courts are divided on their discretion to award or not award fees.

3. In many reported cases, the courts appear to have denied payment of all

fees to attorneys who did not meet disinterestedness requirements. In so holding, several