2007 NORTON BANKRUPTCY LAW SEMINAR MATERIALS
THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY
By Susan M. Freeman
7. DIP clients suffer repercussions from disqualification after the case is
underway, as well. Withdrawal may require duplicative catch-up time of new counsel that
a company in distress may not easily afford. The DIP may also suffer from the court's vacating of critical orders obtained by disqualified counsel.
8. An evidentiary hearing is not required before a court requires disgorgement of fees on grounds of disqualification. Courts are divided on whether a decision to appoint or disqualify counsel or sanction counsel's disqualification through reduced or disgorged fees on an interim basis is an interlocutory, nonappealable order.
Conclusive Effect of Fee Award, and Indemnity, for Ethical Violations.
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When a reorganization case fails, the Chapter 7 trustee and creditor body may seek to find the professionals at fault. In the Merry-Go-Round case, a malpractice suit against the restructuring accountants and business advisors was remanded from bankruptcy court to state court, then settled for $185 million.
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Objections to the quality of services provided, and their benefit to the bankruptcy estate, are considered by the court when awarding fees to a professional employed by the estate. If such objections are raised, or if they could have been raised, a fee award or disgorgement order thereafter has been held to bar later malpractice claims under the doctrine of res judicata. The 2005 amendments to the Bankruptcy Code provide for exclusive jurisdiction of the Bankruptcy Court over all claims or causes of action that
involve construction of Bankruptcy Code §327 or rules relating to disclosure requirements
This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)
