Clue or Clueless: The Continuing Mystery of Ethics
By: Randall A. Rios (Co-author) I. RETENTION OF PROFESSIONALS In re Specialty Rest. Group, LLC, No. 07-30779, 2007 WL 1231603 (Bankr. N.D. Tex. April 24, 2007). The official committee of unsecured creditors (the “Committee”) objected to the debtor’s application to employ general bankruptcy counsel pursuant to sections 327 and 329 claiming that proposed counsel was not disinterested. The objection was premised upon the Committee’s claims that proposed counsel had failed to conduct a UCC search and to commence the debtor’s bankruptcy case within ninety (90) days of the perfection of a security interest by one of the debtor’s secured creditors (i.e. that proposed counsel had committed mal-practice and that the Committee therefore had a claim against it, thereby disqualifying proposed counsel). The bankruptcy court opined that under Texas law, a malpractice claim was personal to the debtor and as such the debtor was the only party that could assert such a claim. Given that client satisfaction is the main inquiry in Texas malpractice cases and that the debtor was satisfied with proposed counsel’s performance, the bankruptcy court approved proposed counsel’s retention over the Committee’s objection. In re Fortune Natural Resources Corp., 366 B.R. 558 (Bankr. E.D La. 2007). Certain of the debtor’s former directors filed a claim pursuant to section 503(b)(1)(A) of the bankruptcy code to which the creditors’ committee objected. The bankruptcy court found that the directors had acted in both their capacities as directors and as “professional persons” as that terms is used in section 330 of the Bankruptcy Code. Since the directors had not and could not be retained pursuant to section 327, due to their “failure to meet the disinterestedness requirement of Section 327(a)”, the Bankruptcy Court denied their claim. In doing so, the Bankruptcy Court opined that “a court should not circumvent the limitations placed on retention of professionals by compensating a disqualified professional under Section 503(b)(1)(A).” In re Modanlo, 342 B.R. 230 (D. Md. 2006). The debtor moved to disqualify counsel (“Counsel”) for one of its creditors alleging that the debtor was a “prospective client” of Counsel. The allegation was based upon the debtor’s telephone conversations with Counsel discussing potential representation of the debtor in the debtor’s yet to be filed bankruptcy case. (Maryland’s Rule 1.18 of Professional Conduct prohibits counsel from representing a client materially adverse to those of a prospective client in the same or substantially related matter.) More specifically, the debtor, though a third party, spoke with Counsel regarding the debtor’s history, formation, corporate structure, ongoing litigation, assets and liabilities, and possible legal strategies. Denying the motion, the court held that: 1) the debtor waived the issue by waiting five months before bringing the motion to disqualify; 2) allowing the debtor to delay the bankruptcy case would be to the tactical advantage of the debtor thereby prejudicing the creditor; and 3) that the debtor had not shared any significantly harmful information with Counsel. TO READ MORE, CLICK THE PDF ICON BELOW: View as PDF |