The Sixth Amendment of the Constitution guarantees the right to assistance of counsel. With this right comes many nuances, including the right of an individual to obtain counsel of his or her choice in civil matters if they choose to engage in such matters. The lawyer-client relationship is a fiduciary one and it carries many responsibilities on the attorney’s part. For example, a lawyer must provide “undivided loyalty” to his or her clients. This means that a lawyer must be aware of any conflicts of interest that may arise in the ordinary course of business. Lawyers must take the necessary steps to disclose, minimize, and/or eliminate such conflicts.
Conflicts of interest and the employment of professional persons in the bankruptcy context are governed under section 327 of the Bankruptcy Code. The general rule for a lawyer as a party’s general counsel in an action is that they must not hold an interest adverse to the estate and they must be a disinterested person. There are exceptions to the rule, such as representations involving potential conflicts of interest and the use of independent conflicts counsel to overcome such conflicts. These determinations are often made on a case by case basis.
Recently, in In re WM Distribution, a bankruptcy court in New Mexico held that a firm was unable to represent two related debtors in a Chapter 11 bankruptcy proceeding because: (1) the two debtor companies had a close working relationship, and (2) although the debtor companies were not mutually owned, the majority shareholders of each company were on opposite sides of a couple going through a divorce. The court held that the entanglement of these two companies were so severe that there were numerous actual conflicts of interest present requiring the disqualification of counsel from representing both parties in the action. Furthermore, the court held that the use of conflicts counsel was not an appropriate remedy for these conflicts because the adverse interests involved were “central to their respective reorganization efforts.”
Bankruptcy is a valuable method of relief for debtors, especially for debtors such as business’ that wish to reorganize and continue on with their companies. But with bankruptcy proceedings comes litigation costs. Such costs only add on to the debts of the parties filing. Because the court is aware of such problems, often times the court will utilize methods to decrease these costs. One such method is the use of independent conflicts counsel. In order to utilize the use of conflicts counsel, the question becomes: (1) when does a conflict of interest disqualify a law firm and its attorneys from representing a client, and (2) when does independent conflicts counsel become an available method to avoid such conflicts?
This memorandum will explore the present question in a threefold approach. Part I discusses the requirements of an attorney to be employed as a professional person under 11 U.S.C. § 327(a) and what qualifies as a “conflict of interest.” Part II analyzes the commonly used exception to this rule under 11 U.S.C. § 327(c). Part III concludes by analyzing the use of conflicts counsel and discussing situations in which its use is not a viable solution for such conflicts.