THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

of causes of action against the DIP's principals for negligence, mismanagement, breach of fiduciary duty, and avoidance of fraudulent transfers when such a suit would be beneficial for the estate (albeit not the DIP management). Waiver of all claims against a proposed DIP lender, without sufficient investigation, was also deemed not in accord with the DIP's fiduciary duties in one case, while another held that failure to collect receivables from an affiliate breached such duties. A debtor has a fiduciary duty to disclose all potential causes of action in its schedules. Failure to disclose potential fraudulent transfer claims against insiders may be deemed a fraud on the court.

1. DIP management breaches its fiduciary duties by diverting business to a related non-debtor company. Similarly, a DIP breaches its fiduciary duty by transferring value in excess of fair consideration to an insider through a "golden parachute" or debt forgiveness. The duty of care also encompasses the duty not to dissipate assets by negligently continuing to operate and incur debts in a Chapter 11 when it is evident that no reorganization can succeed. Several courts have phrased their reasoning for decisions on appointing trustees in chapter 11 cases in terms of DIP breach of fiduciary duties to creditors. Obviously, this duty also encompasses not stealing from estate accounts for unauthorized purposes.
2. DIP counsel may be sanctioned, at least through non-approval of fees, for allowing a DIP to breach its duty of care in the form of using bankruptcy court protection to incur further debt that cannot be paid. The same is true when administrative

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