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Likewise, courts have cautioned that the interests of equity must not be overlooked in focusing on the interests of creditors. When there are different factions of equity holders, counsel must refrain from taking part in disputes and advise the corporation.
7. The duty of loyalty is also owed by the debtor's senior officers. They must avoid any conflict of interest with the estate, including by personal commitments to creditors, actions with respect to liability for avoidance actions, and sales of estate assets in which insider-controlled activities are bidders. When DIP management has substantial, inherent conflicts of interest that interfere with carrying out the fiduciary obligations of a DIP, the court may appoint a Chapter 11 Trustee without finding fraud, dishonesty, incompetence or gross mismanagement.
1. Indisputably, the DIP's fiduciary duty of care includes a duty to protect and maximize the return on estate assets. Appropriate insurance must be maintained. Maximizing estate assets entails investing all funds not needed to meet current expenses, whenever a period of time is expected to elapse before distribution, even after a final report is filed. Attorney retainers should likewise be invested in interest-bearing accounts. A DIP may delegate duties to court-appointed counsel. However, DIP officers may not surrender all their obligations to oversee the estate to that counsel, and may themselves be held liable for breach of fiduciary duty if the lawyer steals estate funds in those circumstances.
2. The duty to maximize estate assets has been held to include prosecution
This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)
