Special Feature: Professor Nancy Rapoport on Recent Disqualification Decisions

Nuance or Necessity for Conflicts in Bankruptcy Cases?

Our thinking about conflicts of interest, especially in large chapter 11 cases involving a battle of BigLaw firms, has gone all catawampus. We are now seeing court decisions on section 327(a) employment applications² that, though they quite properly focus on disinterestedness³ and the disclosures of connections required by Bankruptcy Rule 2014,⁴ manage somehow to skip over the fact that, if we’re talking about law firms seeking employment, the lawyers in those firms are bound by the ethics rules of the bars in which they hold membership. The law firms—and every lawyer in those firms—have to address the issues of conflicts with concurrent clients,⁵ former clients,⁶ or prospective clients.⁷ I find myself increasingly frustrated with the behavior of certain applicants for employment who conveniently fail to address all of the issues raised by state ethics rules.

I know that those rules don’t fit the practice of bankruptcy law, as seen by BigLaw, at least, very well. In my very first published article, I said: “[b]alancing two goals—giving the client the lawyer of his choice and avoiding a situation in which the lawyer is forced to argue both sides at once—is a difficult task in the bankruptcy context. The current ethics rules fulfill the second goal but often defeat the first.”⁸ I distinguished between two types of potential conflicts: first, potential conflicts that, once they morphed from being only potential conflicts to being actual ones, they stayed “actual” for the duration of a bankruptcy case,⁹ and second, those potential conflicts that were issue-specific, dormant, and temporary.¹⁰ These dormant, temporary, actual conflicts might occur or they might not, depending on what happened in the case, but if they occurred, they would occur only for one minor issue—then they would disappear. For DTACs, I suggested that the client could either consent to the dual representation¹¹ or use conflicts counsel, depending on the situation.¹²

That article wrestled with the idea that “normal” conflicts of interest rules really didn’t fit the bankruptcy world, because in our world, the parties can shift alliances throughout a case.¹³ I’m still right about the shifting alliances part, but somewhere along the line, conflicts analysis got worse. We seem to have stopped applying the state ethics rules in their full glory, rather than trying to see how they might fit within the realities of bankruptcy practice. And I understand why: the “fit” of those rules drives BigLaw crazy.¹⁴ The rules just don’t work for large law firms with a multitude of clients, some of whom will figure prominently in the case and some of whom may not appear at all. And big clients want BigLaw firms.

Here’s the problem: some BigLaw firms are conflating the rules regarding employment in bankruptcy cases, the state ethics rules that apply to the lawyers in the firm, and the developing case law around advance waivers to seek employment in situations in which they should be conflicted out. To the extent that any law professor has any effect on the “real world,”¹⁵ I blame myself for at least part of the catawampusness¹⁶ of our thinking on conflicts of interest, and I’d be willing to take Orin Kerr up on his idea for a symposium issue in which professors recant their earlier articles.¹⁷

Two recent conflicts opinions with very different results have highlighted the challenges of parsing conflicts of interest. One of those opinions is the not-for-publication opinion in In re Invitae Corp.¹⁸ The other is In re Enviva, Inc.¹⁹ In Invitae, the court approved the employment of BigLaw Firm 1 as attorneys for the DIP; in Enviva, the court declined to approve the employment of BigLaw Firm 2. Let’s explore the differences in those two cases.

In Invitae, prior to the petition, the debtors had entered into a transaction with a secured noteholder²⁰ that made the secured noteholder the debtors’ largest secured creditor (with 79% of the debtors’ debt).²¹ BigLaw Firm 1 wasn’t involved in that transaction at all, but it continues to represent the secured noteholder, though not in connection with the Invitae bankruptcy^.22 The Unsecured Creditors’ Committee pointed out that the original transaction could be a central issue in the bankruptcy case and asked the Bankruptcy Court to limit BigLaw Firm 1’s work to matters that did not involve the secured noteholder.²³ The United States Trustee went further, asking for the Court to deny the application to employ BigLaw Firm 1.²⁴

The Court found that “such concurrent representation does not create a per se conflict that prohibits retention,”²⁵ observing that, although BigLaw Firm 1 was bound by Rule 1.7 (the concurrent conflicts ethics rule), the secured noteholder was represented by two other firms in the bankruptcy case. Moreover, “[BigLaw Firm 1] was not counsel to Debtors at the time of the Transaction, did not represent either party in the context of the Transaction, and [BigLaw Firm 1’s] present representation of [the secured noteholder] pertains to matters wholly unrelated to the pending Chapter 11 bankruptcy….”²⁶ The Court concluded that “[BigLaw Firm 1’s] zealous representation of [the secured noteholder] in other, unrelated matters does not present a significant risk that its representation of the Debtors in this bankruptcy case will be in any way impacted or limited—and Rule 1.7(a)(2) is not implicated.”²⁷ Hmmm.

Let’s think about the Court’s point that, in the bankruptcy case, BigLaw Firm 1 didn’t represent the secured noteholder. As a refresher, Rule 1.7 says:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing.²⁸

Rule 1.7(a) doesn’t say “shall not represent a client in the same or a similar matter.” It says “shall not represent a client if the representation involves a concurrent conflict of interest.” Then Rule 1.7(a) defines “concurrent conflict of interest” as direct adversity (e.g., plaintiff vs. defendant) or as “a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client … or by a personal interest of the lawyer.”²⁹ In other words, the definition of “concurrent conflict of interest” includes the situation in which the clients aren’t going directly against each other but the lawyer for both clients might be tempted to pull his or her punches in favor of one client. The blanket prohibition includes an “out” in Rule 1.7(b), and part of that “out” involves informed consent by both clients, if subsections (1),(2), and (3) have also been met. We’ll get back to informed consent in a bit, but first, let’s return to the Invitae opinion itself.

To address the Committee’s point that BigLaw Firm 1 was seeking to represent the Debtors while the firm concurrently represented the noteholder, the Court then focused on the “extensive and detailed waivers” to conclude that the secured noteholder had waived any conflict.³⁰ In essence, the Court held that BigLaw Firm 1 wasn’t circumventing 11 U.S.C. § 327(a) because BigLaw Firm 1 drafted engagement letters for which BigLaw Firm 1’s clients waived any potential conflict.³¹

Here’s the language of the waiver:

Conflicts of Interest. As is customary for a law firm of the Firm’s size, there are numerous business entities, with which Client currently has relationships, that the Firm has represented or currently represents in matters unrelated to Client.

Further, in undertaking the representation of Client, the Firm wants to be fair not only to Client’s interests but also to those of the Firm’s other clients. Because Client is engaged in activities (and may in the future engage in additional activities) in which its interests may diverge from those of the Firm’s other clients, the possibility exists that one of the Firm’s current or future clients may take positions adverse to Client (including litigation or other dispute resolution mechanisms) in a matter in which such other client may have retained the Firm or one of Client’s adversaries may retain the Firm in a matter adverse to another entity or person.

In the event a present conflict of interest exists between Client and the Firm’s other clients or in the event one arises in the future, Client agrees to waive any such conflict of interest or other objection that would preclude the Firm’s representation of another client (a) in other current or future matters substantially unrelated to the Engagement or (b) other than during a Restructuring Case (as defined below), in other matters related to Client (such representation an “Allowed Adverse Representation”). By way of example, such Allowed Adverse Representations might take the form of, among other contexts: litigation (including arbitration, mediation and other forms of dispute resolution); transactional work (including consensual and non-consensual merger, acquisition, and takeover situations, financings, and commercial agreements); counseling (including advising direct adversaries and competitors); and restructuring (including bankruptcy, insolvency, financial distress, recapitalization, equity and debt workouts, and other transactions or adversarial adjudicative proceedings related to any of the foregoing and similar matters).

. . .

Restructuring Cases. If it becomes necessary for Client to commence a restructuring case under chapter 11 of the U.S. Bankruptcy Code (a “Restructuring Case”), the Firm’s ongoing employment by Client will be subject to the approval of the court with jurisdiction over the petition. If necessary, the Firm will take steps necessary to prepare the disclosure materials required in connection with the Firm’s retention as lead restructuring counsel. In the near term, the Firm will begin conflicts checks on potentially interested parties as provided by Client.

If necessary, the Firm will prepare a preliminary draft of a schedule describing the Firm’s relationships with certain interested parties (the

“Disclosure Schedule”). The Firm will give Client a draft of the Disclosure Schedule once it is available.³²

An aside: the first part of the waiver (everything other than the part about Restructuring Cases) is pretty standard, though it’s subject to the normal test of whether the waiver is based on informed consent.³³ It’s the Restructuring Cases part of the waiver that is different. The language about Restructuring Cases reads to me as “the gloves are off,” as a way of dealing with the “hot potato” rule.³⁴ The waiver has a one-two punch: (1) the Court has to approve us as counsel, so there’s someone looking out for your interests, and (2) you already agreed to our representing the Debtors, even if that means that we’ll be opposite you in “litigation (including arbitration, mediation and other forms of dispute resolution); transactional work (including consensual and non-consensual merger, acquisition, and takeover situations, financings, and commercial agreements); counseling (including advising direct adversaries and competitors); and restructuring (including bankruptcy, insolvency, financial distress, recapitalization, equity and debt workouts, and other transactions or adversarial adjudicative proceedings.” That is one super-broad advance waiver, and the secured noteholder, sophisticated or not, might have been able to argue that BigLaw Firm 1 was too vague in its descriptions of what was being waived in advance.³⁵

Observing that this particular secured noteholder was, in fact, sophisticated,³⁶ the Court also pointed out that the secured noteholder represented only 0.03% of its total billings in 2023 and even less in 2024.³⁷ As the Court explained, “[t]o be clear, the fact that [BigLaw Firm 1] bills such a high amount is not a commentary on their worthiness of retention; nor does it offer them a free pass to skirt the rules. Rather, case law instructs that the economic impact is a consideration that the Court should take into account in gauging material adversity.”³⁸ Therefore, the economic impact factor favored the employment of BigLaw Firm 1.³⁹ As the Court put it, “[n]othing presented to date suggests that [BigLaw Firm 1] cannot zealously represent the debtor and the bankruptcy estate’s interests.”⁴⁰

Then the Court discussed the argument that booting BigLaw Firm 1 off the case would “cause undue delay and significant additional expenses.”⁴¹ It puts the finger on the side of the scale that says that a debtor should be able to pick its counsel, no matter what.⁴² That leaves the other side of the scale—a law firm’s other concurrent clients—pretty high up in the air. Maybe those clients don’t care, because they have other counsel. Maybe they do care, but they signed ironclad advance waivers. And maybe they didn’t want to sign those waivers, but so many BigLaw firms are using them that they felt as though they had no other options.⁴³

Finally, the Court considered the Committee’s suggestion that BigLaw Firm 1 at least be prohibited from representing the Debtors on matters relating to the secured noteholder itself. The Court found that proposition unworkable. Simply put, the Court is loath to place such handcuffs on Debtors’ counsel. [The secured noteholder] is the major secured creditor in this bankruptcy case—holding nearly 79% of the debt. Given [the secured noteholder]’s role, any attempt to limit [BigLaw Firm 1’s] representation to work that does not impact [the secured noteholder] would be impractical, difficult to police, and engender further debate and contest. It is likely that even the most minimal task will affect [the secured noteholder]’s interests and any meaningful work undertaken nearly certainly will. The Court is unwilling to narrow the scope of [BigLaw Firm 1’s] retention as requested by the Committee.⁴⁴

The Court did not address the line of cases refusing to approve employment when the potential conflict was central to the case.⁴⁵

The Enviva court, on the other hand, did address that line of cases:

In the Court’s view, this case is more analogous to In re Project Orange Assocs., LLC, 431 B.R. 363 (Bankr. S.D.N.Y. 2010). In Project Orange, proposed debtor’s counsel represented GE, the debtor’s largest unsecured creditor and the supplier of gas turbines critical to the debtor’s operations. Id. at 365-66. Proposed debtor’s counsel argued that it could use conflicts counsel for any issues related to GE. Id. at 366. The court rejected that suggestion, holding that it did not appear that proposed debtor’s counsel could “‘fairly and fully advise’ in the negotiation and drafting of a plan when it may not even be able to advocate litigation against GE.” Id. at 377.

The Court ultimately denied the application to employ proposed debtor’s counsel. Id. at 379 (“as [proposed counsel’s] conflict is with the Debtor’s largest unsecured creditor that is central to the issues in this case, the Court concludes that it is inappropriate to approve the retention application.”) In this case too, the Court cannot see how [BigLaw Firm 2] could possibly negotiate a plan adversely to [the equity security holder]’s position. The employment of conflicts counsel can be useful for a discrete portion of a case, such as the prosecution of preference or fraudulent transfer claims, but it cannot be used as a substitute for general bankruptcy counsel’s duties to negotiate a plan of reorganization. In re WM Distribution, Inc., 571 B.R. 866, 873 (Bankr. D.N.M. 2017) (“use of conflicts counsel is not appropriate where the adverse interests of the debtors represented by the same general bankruptcy counsel are central to the reorganization efforts of either debtor or to other resolutions of the chapter 11 case or where the adverse interests are so extensive that each debtor should have its own independent general bankruptcy counsel.”)[.]⁴⁶

In Envira, the Debtors had sought approval for interim DIP financing, with the financing to come from an ad hoc group.⁴⁷ The Court approved the interim financing but raised questions about “the Debtor[s’] proposal to pay $4.6 million of tax and other liabilities for a non-debtor entity known as Enviva Wilmington Holdings, LLC (‘EWH’),”⁴⁸ and the Debtors withdrew that request.⁴⁹ The case involved three different types of concurrent conflicts that needed to be resolved: could BigLaw Firm 2 represent the Debtors and (simultaneously) (1) four members of the ad hoc group involved in the DIP financing,⁵⁰ (2) several of the Debtors’ officers and directors who contended that, in various derivative lawsuits, they were entitled to indemnity from the Debtors (and who would stand to get 3.5% of the equity in any reorganized entities, based on a restructuring support agreement),⁵¹ and (3) another investment group and its affiliates, which owned 4% of the Debtors’ equity (and with which two members of the Debtors’ board are affiliated)?⁵² In particular, the same lawyers in the firm were doing work for both the debtors and that investment group, “thereby making any ethical walls impossible.”⁵³

The Debtors sought to employ BigLaw Firm 2, along with BigLaw Firm 3 as co-counsel.⁵⁴ As part of its employment application, BigLaw Firm 2 also disclosed that it represented a group of equity security holders in the Debtors.⁵⁵ The application did not include a discussion of any ethical walls.⁵⁶

Of all of these concurrent conflicts, the Court found the concurrent conflict with the investor group to be the most troubling. That investor group represented about 0.8% of BigLaw Firm 2’s billings—$14 million a year—but the client had consented to BigLaw Firm 2’s representation of the Debtors and was planning to use its own lawyer in the bankruptcy.⁵⁷ The Envira court was, in the end, troubled only by the last representation in this list.⁵⁸

After the Court walked through the standards for employment and for Rule 2014,⁵⁹ it found that “[BigLaw Firm 2] was not deficient in its disclosure obligations in this case… [even with respect to the] ‘late entrant’ into the Debtors’ debt structure….”⁶⁰ The Court also found that the concurrent representation of the officers and directors was permissible because the potential 3.5% of equity in the reorganized entities had not become ripe for a ruling.⁶¹ Citing In re Harold & Williams Development Company,⁶² the Court observed that “[a] court should then weigh, against the risks of any potential difficulties, the potential advantages to the bankruptcy estate of a dual appointment, such as savings of time and money spent on estate administration.”⁶³ In other words, the Court deferred ruling on the issue of concurrent representation of the officers and directors until such time, if any, that the potential conflict changed into an actual issue.⁶⁴

But representing that one investment group and the affiliates, along with the Debtors? That was a bridge too far for the Court:

The Court finds that [BigLaw Firm 2’s] simultaneous representation of [that group] renders [BigLaw Firm 2] not disinterested under Bankruptcy Code Section 327(a). [That group] has a 43% interest in the Debtors’ common stock. It has two of the Debtors’ thirteen directors’ seats. [BigLaw Firm 2’s] representation of [that group] is extensive [as it] is a $14 million-dollar-a-year client of the firm.⁶⁵

The beauty of this opinion lies in part in its next paragraph: “[BigLaw Firm] argues that it only represents [that group] in unrelated matters, [that group] has consented to [BigLaw Firm’s] representation of the Debtors in this case, and the Debtors have consented to [BigLaw Firm’s] continuing representation of [that group]. While consent may satisfy certain State bar rules on conflicts,⁶⁶ it is not a substitute for disinterestedness under Section 327(a).”⁶⁷

The Court listed all of the factors that it considered in denying the application for employment:

This is not an academic concern. This is a case in which the Debtors have touted the RSAs as the basis for a stand-alone plan. It is not a case in which the Debtors seek approval for a Section 363 sale of substantially all their assets. The RSAs contemplate that existing equity holders will retain five percent (5%) of the equity in the reorganized entities. This will have to be negotiated with the Committee and the other constituents in the case. [BigLaw Firm 2] suggests that if this becomes a problem, it will look to its co-counsel, [BigLaw Firm 3], to negotiate [that group’s] related provisions of the plan. A plan in a stand-alone reorganization case, though, is like a machine in which all of the parts depend on all of the other parts. Further, the allocation of equity in the reorganized entities is a zero-sum game – whatever old equity retains will come at the expense of the creditors unless the creditors are paid in full (or the plan is a consensual one). Even in the case of a “new value” plan, the creditors are entitled to challenge the sufficiency of any new value contribution and to demand that such contributions be market-tested. The Court in this case just does not see how [BigLaw Firm 2] can delegate this core function of Chapter 11 counsel to its co-counsel.⁶⁸

The Court also distinguished this situation from the situation in Invitae:

[T]he Court finds that there is an actual conflict of interest. [BigLaw Firm 2] cannot be expected to negotiate a Plan that contravenes the interests of its $14 million-dollar-a-year client. In Invitae, the proposed law firm billed the adverse party and client … a total of $2.4 million from the inception of the relationship, and $1.8 million in 2023, representing 0.03% of the applicant’s revenue for that year. Id. [Invitae] at *5. The court described this as “relatively de minimus” [sic] in the scheme of things. Id. In this case, [BigLaw Firm 2’s] revenue from [that group] amounts to 1.4% of its annual revenue for 2023, or 46 times more than the percentage of annual revenue in Invitae. The Court does not view [BigLaw Firm 2’s] revenues from [that group] to be de minimus [sic] in any sense of the term.⁶⁹

There you have it: in Invitae, the troublesome other concurrent client was a tiny portion of BigLaw Firm 1’s billings,⁷⁰ and it was a sophisticated client that had signed an advance waiver that specifically addressed restructuring situations, especially because that client had retained separate counsel in the bankruptcy case. Thus, it was fine for BigLaw Firm 1 to represent the Debtors and a major secured noteholder. But in Envira, the Court found that BigLaw Firm 2 couldn’t represent the Debtors and still negotiate against its $14 million-a-year client in negotiating a plan. What gives?

In part, these questions are, as both courts recognize, extremely fact-specific. As long as the parties disclose what they’re supposed to be disclosing under Rule 2014, a court can sift through the various factors and come to a reasoned decision. But three aspects of these cases bother me.

The first aspect concerns the perception that rulings such as Invitae are intended to signal that a court is friendly to debtors, or to BigLaw, or to case-placers in BigLaw, or to some other group. That perception may well not reflect reality,⁷¹ especially because situations like these are (so far) the exceptions that prove the rule—many courts don’t bend the Code or other statutes too far. But in my conversations with several practitioners, that perception is growing, and it’s leading to a combination of cynicism and fatalism that can’t possibly be good for the bankruptcy system.⁷²

The second aspect concerns the short-ish shrift that Rule 1.7(b) gets in these discussions. In order to pass muster in a concurrent client situation, all four subsections have to be met, and subsection (1) relates directly to “it’s only a small part of the firm’s billings.” In other words, having sophisticated clients who sign advance waivers won’t survive Rule 1.7(b) unless the lawyer/law firm also can prove that it reasonably believes that it can represent both clients competently and diligently.

The burden shouldn’t be on those objecting to employment to explain why a lawyer’s belief “the lawyer will be able to provide competent and diligent representation to each affected client” isn’t reasonable, but on the firm seeking approval of its employment to prove that its belief is reasonable.⁷³ The proportion of billings attributable to the client should be a factor in the court’s consideration, but it shouldn’t be the only factor, and it shouldn’t be the factor weighted most heavily. Think of all of the factors that go into that one, difficult-to-verify number, including firm size and billing rates. Moreover, the larger the firm, the smaller the percentage of billings that will be attributable to each client, so this one metric rewards the Goliaths in the industry. As Professor Jonathan Lipson reminded me, “[t]he percentage-of-revenue test for potential conflicts seems to be an especially poor proxy because it will reward larger firms and punish smaller ones, and is indifferent to the nature of the work, the identities of the attorneys, and the economics of the matter(s) in question.”⁷⁴

The whole point about the concurrent conflicts ethics rule is that law firms owe two fiduciary duties to their current clients: the duty to keep confidential information confidential, and the duty of loyalty (the duty not to favor one client over another). That’s the test—not an arithmetic comparison of proportionality. BigLaw Firm 1 happens to be incredibly profitable, so should it get a pass because it rakes in so much that no single client is going to represent a high percentage of its annual billings? The percentage of billings attributable to a client simply won’t tell the whole story. Even a small client who is one of the top partners’ favorite clients might encourage that partner (and therefore associates working for that partner) to protect that client’s interests at the estate’s expense.⁷⁵ Separate and apart from the disinterestedness requirement, court decisions should consider whether a firm that has two active clients who are parties in interest in a bankruptcy case should be representing both of them, neither of them, or only one of them. And because a court’s decisions on conflicts depends on two things—how the applicant describes them and how the court perceives them—the significance of any conflicts review is extremely fact-specific.

The third aspect has to do with those pesky advance waivers and what they signal about BigLaw life these days. Go back and read the advance waiver that BigLaw Firm 1 requires its clients to sign. Then re-read note 43 in this essay, in which the Association of Corporate Counsel explains that, much of the time, even big institutional clients are unable to push back against those waivers.⁷⁶ Should we, as lawyers, be asking so much of our clients, especially with language that, in essence, treats one of the clients as a hot-potato⁷⁷ when it comes to future waivers of restructuring matters? Why are law firms asking for client permission to behave in such a manner,⁷⁸ and why are some courts letting them? At some point, shouldn’t we go back to basic principles and start with the ethics rules, not the Code? Consider Professor Jonathan Seymour’s point about bankruptcy judges not wanting to stand in the way of Pareto-optimal solutions:

A judge that takes a narrower view of her authority and therefore stands in the way of an arrangement that key constituencies in the case argue is a necessary component of a reorganization may be accused by proponents of frustrating an outcome that could be Pareto superior, condemning the business instead to be sold off in parts in a liquidation sale that generates minimal value for any stakeholders. Particularly if the judge shares the problem-solving ethic of reorganization practice, her incentive is to grant approval rather than risk taking the blame for dooming the case.⁷⁹

That perspective might explain a court’s decision to look only to Section 327 and Rule 2014, rather than applying the ethics rules. In addition, not only do the ethics rules not fit bankruptcy practice (or family law practice) very well, they wreak havoc on the client base of the largest law firms. Yes, the rules don’t fit. But have we gone too far? Are we getting to the point where BigLaw has significantly more leverage than its sophisticated clients have? I worry that, given how few of the BigLaw players are major players in large chapter 11s these days, soon just a few BigLaw firms will make the law and set the rules even when caselaw directly on point or a statute dictates a different result.⁸⁰

The ethics rules don’t fit well with any practice areas that involve constantly shifting alliances, such as bankruptcy law and family law, so I’m not recanting that part of my very first article. But my own work has given some ammo to law firms that want to take my theories farther than I intended, and for that, I blame myself.⁸¹ Let’s do a reset. We need to focus on fact-specific nuance here, and nuance applied to actual legal principles, rather than on focusing on the argument that BigLaw firms are, well, really big and thus just need special treatment because they’re the only firms large enough to do the work.

---

* © Nancy B. Rapoport 2024. All rights reserved. Reprinted with Permission by the Creditor Rights Coalition. Many thanks to a few anonymous commenters, along with J. Scott Bovitz, Dan Kamensky, Jonathan Lipson, Aditi Paranjpye, Bill Rochelle, Joseph R. Tiano, Jr., and Jeff Van Niel, all of whom helped with an earlier draft of this essay.

2 11 U.S.C. § 327(a) states: Except as otherwise provided in this section, the trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.

3 11 U.S.C. § 101(14) defines “disinterested person” as: a person that— (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason. So to fit within section 327(a), the professional seeking employment must not “hold or represent an interest adverse to the estate” and must be disinterested.

4 Bankruptcy Rule 2014(a) requires the professional seeking court approval of its employment to include certain disclosures in its application: An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to §327, §1103, or §1114 of the Code shall be made only on application of the trustee or committee… The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.

5 See MODEL R. PRO. CONDUCT R. 1.7.

6 See MODEL R. PRO. CONDUCT R. 1.9.

7 See MODEL R. PRO. CONDUCT R. 1.18.

8 Nancy B. Rapoport, Turning and Turning in the Widening Gyre: The Problem of Potential Conflicts of Interest in Bankruptcy, 26 CONN. L. REV. 913, 975-76 (1994) [hereinafter Turning & Turning]. My buddy J. Scott Bovitz has teased me with the thought that I probably started publishing in elementary school, with less grandiose topics. Actually, back then, I did poetry.

9 For example, another law firm client decides that its interests are best protected if the case is converted from chapter 11 to chapter 7. That type of conflict might not happen, but if it happens, it’s not going away.

10 For example, another law firm client decides that it wants to purchase an asset from the estate that the selfsame law firm is representing. That conflict is actual but will disappear after the purchase issue is resolved. For that type of conflict, the firm cannot represent both sides of the transaction. The potential purchaser will have to use another law firm for that transaction. See MODEL R. PRO. CONDUCT R. 1.7(a).

11 Presumably with an ethical wall, though I didn’t make that point clear in the article.

12 If the possibility that the potential conflict will become actual is remote and the harm of temporary withdrawal is minimal, then the client is likely to consent to simultaneous representation without hesitation. If the possibility of potential conflict becoming actual is remote but the harm of temporary withdrawal is great, the client must consider whether the harm outweighs the risk–especially because not every potential conflict will be a DTAC [dormant, temporary, actual conflict]. Some potential conflicts develop into actual and permanent conflicts, necessitating withdrawal for the remainder of the case. If, on the other hand, the harm of withdrawal is negligible, then even if the likelihood of a potential conflict becoming actual is high, the client should still be willing to consent to simultaneous representation (at least if the potential conflict will, at worst, become a DTAC). That way, unless and until a conflict becomes actual, the client still can use her own lawyer, whom she prefers to another second-choice lawyer. Obviously, if both the likelihood that an actual conflict will develop and the magnitude of harm from a temporary withdrawal are high, the client should think twice before consenting to simultaneous representation, and the lawyer should think three or four times before even broaching the possibility of representation with the client. Id. at 986-87; see also id. at 990 (“The primary contribution of this theory is that it separates the question of whether the initially chosen lawyer should represent this client who selected her as counsel (typically asked at the beginning of the case) from the different question of whether that chosen lawyer should represent the client during the temporary conflict. The two-part test focuses on the overall benefit to the client from a particular lawyer’s representation by acknowledging that temporary conflicts may preclude representation during a portion of a legal matter but may not necessarily preclude the resumption of that representation after the conflict is over.”); cf. Nancy B. Rapoport, Client-Focused Management of Expectations for Legal Fees in Large Chapter 11 Cases, 28 AM. BANKR. INST. L. REV. 39, 51 n.43 (2020) (“I live for the day that someone, somewhere, will cite this article [Turning & Turning] for the proposition that appointing conflicts counsel is a good idea”).

13 See Turning & Turning at 914-15 (“In the arena of bankruptcy, however, a party’s position is not set in stone. Although the roles of the various parties in interest in a bankruptcy case—the debtor, the trustee, the creditors’ committee, the secured creditor, the unsecured creditor, a potential buyer, etc.—may not change over the course of a case, a particular party’s allegiances may shift from faction to faction, depending on the specific issue involved. A party in interest may not be bothered at all by this position-shifting, as the changes in allegiance are all part of a larger effort to protect the party’s own interests. But a lawyer considering whether to represent a client has a problem to confront: whether she may take on the representation at all.”) (footnotes omitted).

14 I, too, am a creature of BigLaw, though it’s been decades since I’ve set foot in my old firm’s offices.

15 There are law professors who truly are influential in the real world—I’m reasonably sure that my musings on conflicts of interest don’t put me in that category.

16 Not a word, but should be.

17 See Orin Kerr, Tweet, X.COM (May 17, 2024):

18 United States Bankruptcy Court, District of New Jersey, Case No. 24-11362-MBK (Doc. 500, May 16, 2024). It may not be for publication, but it’s mentioned in Enviva, and I’m going to discuss it.

19 United States Bankruptcy Court, Eastern District of Virginia, Case No. 24-10453-BFK (Doc. 653, May 30, 2024).

20 And its affiliates.

21 Invitae at 2.

22 Id.

23 Id. at 2-3.

24 Id. at 3.

25 Id. at 4.

26 Id. at 5 (citations to record omitted).

27 Id. at 5.

28 See MODEL R. PRO. CONDUCT R. 1.7, https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_7_conflict_of_interest_current_clients/.

29 See id. cmt. 8 (“Even where there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer’s other responsibilities or interests.”).

30 Invitae at 6. The Court focused on Rule 1.7(b)(4) (the waiver provision), but it didn’t focus on the fact that Rule 1.7(b) requires all four subsections to be met.

31 Id. It’s always handy to have a best friend who gives good comments on drafts of my articles, and my frequent co-author and bestie, Joe Tiano, has once again come through for me: “The court’s conclusion mimics and affirms what the client explicitly did – that is, waive a conflict, no? It had to decide on different grounds than 1.7 or else it opened up the thorny issue of the efficacy of the advance waiver.” Email from Joseph R. Tiano, Jr. to author (June 4, 2024) (on file with author). That is exactly what happened.

32 Id. at 6-7. The way that I read this part of the waiver, the clients that sign it are basically telling their lawyers to do whatever they want in the event of a reorganization. That idea pushes Rule 1.7 past its breaking point. There are too many good lawyers and good law firms out there for the relatively few with the largest market share to be able to treat their clients this way, and I would like for clients that are presented with waivers of this type at least to consider reaching out to other law firms to see if those firms’ waivers are as loose. But see n. 43, infra, and accompanying text.

33 Everyone should read Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 6 Cal.5th 59, 86 (2018) (for blanket advance waivers, “without full disclosure of existing conflicts known to the attorney, the client’s consent is not informed for purposes of our ethics rules.”).

34 For a nice primer on the “hot potato” rule (as in “dropping a client like a hot potato”), see, e.g., Ronald E. Mallen, § 17:24. Defenses—Attorney-Client relationship—The “hot potato” rule and thrust-upon conflicts, 2 LEGAL MALPRACTICE § 17:24 (2024 ed.).

35 See Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., 6 Cal.5th 59, 86 (2018). When Bill Rochelle reviewed an earlier draft of this essay, he pointed out: “A client can perhaps give a binding advance waiver, but what about the debtor’s creditors? How can creditors know for sure that the debtor’s counsel will not favor a concurrent client.” Email from Bill Rochelle to author (June 1, 2024) (on file with author).

36 Id. at 8.

37 See id. at 9.

38 Id. at 9.

39 Id.

40 Id. at 10 (footnote omitted).

41 Id. This argument is not too far off the mark from the argument that “we did good work, so don’t punish us.” See, e.g., Jackson Walker LLP’s Response in Opposition to the United States Trustee’s Amended and Supplemental Motion For (1) Relief From Judgment Pursuant to Federal Rule of Civil Procedure 60(B)(6) and Federal Rule of Bankruptcy Procedure 9024 Approving the Retention and Compensation Applications of Jackson Walker LLP, (2) Sanctions, and (3) Related Relief, In re 4E Brands Northamerica, LLC, United States Bankruptcy Court, Southern District of Texas, Case No. 22-50009 (Doc. No. 692, May 22, 2024) at 72 (“The integrity of the bankruptcy process is paramount indeed, but integrity would not be restored by punishing a law firm that helped to effectively and efficiently shepherd its clients through chapter 11, consummating in each case a restructuring or other resolution that was—as a matter of law—in the best interests of the applicable estate.”) (footnote omitted); Jackson Walker LLP’s Supplemental Objection to Mr. Culberson’s Motion For Relief From All Orders Approving All Applications For All Professional Fees and Reimbursement Expenses as to Jackson Walker, LLP and Motion to Disgorge Said Fees and Expenses and to Remove Professionals From This Matter, In re Sorrento Therapeutics, Inc., United States Bankruptcy Court, Southern District of Texas, Case No. 23-90085 (Doc. No. 2214, May 22, 2024) at 49 (“Even if this court considered such relief, disgorgement or the denial of compensation to JW for services it performed—and continues to perform—on behalf of the Debtors in these Cases is entirely unwarranted. JW’s services have provided a material and consistent benefit to the Debtors’ estates, and no party has suffered any harm from JW’s representation of the Debtors as local counsel in these Cases.”). For a discussion of the whole David Jones-Liz Freeman-Jackson Walker mess, see, e.g., Nancy B. Rapoport, Am I My Colleagues’ Keeper When It Comes to Disclosing Connections?, 40 EMORY BANKR. DEV. J. ___ (forthcoming 2024); Nancy B. Rapoport, Failing to See What’s in Front of Our Eyes: The Effect of Cognitive Errors on Corporate Scandals, 16 WM. & MARY BUS. L. REV. 1 (forthcoming 2025).

42 Remember, I’m backing off of that more general statement. See, e.g., nn. 11-5, supra, and accompanying text.

43 The Association of Corporate Counsel had this to say about advance waivers: Not only does the rule advanced by Sheppard weaken this principle [lawyers as fiduciaries for their clients] by elevating an attorney’s profits above the client’s trust, it also ignores the practical reality that even sophisticated clients often have little bargaining power against a large law firm. New clients of a law firm are routinely presented with an advanced conflict waiver as a non-negotiable, take-it-or-leave-it option. This is particularly true for clients who may not have future matters with which to leverage. See W. Bradley Wendel, Pushing the Boundaries of Informed Consent: Ethics in the Representation of Sophisticated Clients, 47 U. TOL. L. REV. 39, 42 (2015). And long-time clients may agree to an advance waiver because of the enormous cost and burden of moving the work to a new firm without the institutional knowledge of that client. Designed to protect law firm profits, these law firm practices persist because clients have limited bargaining power to negotiate these terms. Application for Leave to File Amicus Curiae Brief and (proposed) Amicus Curiae Brief in Support of Association of Corporate Counsel in Support of Defendant and Respondent J-M Manufacturing Co. 2016 WL 11594703 (Cal.) (Appellate Brief), Supreme Court of California, at *12 (citation omitted).

44 Id. at 10-11.

45 See, e.g., In re Project Orange Assocs., LLC, 431 B.R. 363, 375 (Bankr. S.D.N.Y. 2010); In re WM Distribution, Inc., 571 B.R. 866, 873 (Bankr. D. N.M. 2017) (citing to Project Orange and observing that “[the] use of conflicts counsel is not appropriate where the adverse interests of the debtors represented by the same general bankruptcy counsel are central to the reorganization efforts of either debtor or to other resolutions of the chapter 11 case or where the adverse interests are so extensive that each debtor should have its own independent general bankruptcy counsel.”). For a nice discussion of the Project Orange point that conflicts counsel can’t cure all ills, see Gregory W. Fox, Project Orange: Debtor’s Counsel’s Irreparable Conflict With Key Creditor Not Cured By Waiver, 29-Sep. AM. BANKR. L.J. 30 (2010).

46 Enviva at 14-15.

47 Id. at 2.

48 Id. The United States Trustee also raised questions about this proposal. Id. One of BigLaw Firm 2’s clients is a member of EWH and thus would have “benefitted indirectly” from that then-dropped proposal. Id. at 3.

49 Id.

50 Id. at 5 (one of those clients came on board after BigLaw Firm 2 filed its employment application. Id.

51 Id.

52 Id. at 6.

53 Id. Already exhausted at this list? Me, too.

54 Id. at 4.

55 Id.

56 Id.

57 Id. at 6-7. Also, BigLaw Firm 2 may have received some preferential payments, but we know how to take care of those, so let’s leave that issue aside for the purposes of this essay.

58 Id. at 8.

59 For its discussion of Rule 2014, the Court cited to, among other cases, In re Lewis Rd., LLC, 2011 WL 6140747, at *7 (Bankr. E.D. Va. Dec. 9, 2011). Id. at 9. In particular, the Court quoted part of that case: Disclosures made pursuant to Rule 2014 “must be explicit enough for the court and other parties to gauge whether the person to be employed is not disinterested or holds an adverse interest.” “[D]ebtors–in–Possession and their attorneys, whose employment is sought to be approved, [must] be meticulous in disclosing ‘all connections’ with the debtor and other parties in interest, and the failure to do so [justifies] a Court’s taking significant punitive or corrective action.” Id. In re Lewis Rd., LLC, 2011 WL, at *8 (citations omitted). See Envira at 9.

60 Id. at 10. In a footnote, the Court noted that it would have “preferred to know of [BigLaw Firm 2’s] representation of [a particular client] at the first day hearing, where the Debtors proposed to pay $4.6 million in tax obligations for a non-debtor entity, EWH, in which [that client] is a member.” Id. n. 7. The Court did not address the timing of disclosure about one of the four members of the ad hoc group, though. See n. 54, supra, and accompanying text.

61 Id. at 11.

62 977 F.2d 906, 911 (4th Cir. 1992).

63 Id. (emphasis in original).

64 Id.

65 Id. at 12 (citation to earlier part of opinion omitted).

66 Author’s note: Or not. See nn. 28-29, supra, and accompanying text.

67 Envira at 12.

68 Id. at 13-14 (citation omitted). The Court also noted the lack of an ethical wall as a potential corrective measure. See id. at 13.

69 Id. at 15-16.

70 As my buddy Jonathan Lipson put it in an email to me, “[a]s soon as you replace the “v.” with “In re”, the reference points become unclear. I think that may explain why percentage-of-revenue is an attractive metric: it sounds concrete and objective. It is perhaps a cognitive substitute for the clarity of a traditional (if stylized) adversary environment.” Email from Jonathan Lipson to author (June 3, 2024) (on file with author).

71 For an aggressive tweet comparing the two cases, see Kevin Eckhardt, X.COM (May 30, 2024, 12:27 PM).

72 Joe Tiano has pointed out to me that forum-shopping in bankruptcy is different from forum-shopping in other types of matters: “The problem with bankruptcy is there is nowhere else to go with measurably different rules of engagement so it may feel more like pure judge/forum shopping than in other contexts where you may take jury composition or other procedural factors into account.” Email from Joseph R. Tiano, Jr. to author (June 3, 2024) (on file with author).

73 For a discussion about the idea that the ethics rules aren’t being policed well in bankruptcy cases, see Daniel B. Kamensky, The Rise of the Sponsor-in-Possession and Implications for Sponsor (Mis)Behavior, 171 U. PA. L. REV. ONLINE 19, 24 (2024) (referring to a trend indicating that “[s]ponsors [are avoiding] third-party independent scrutiny because of the failure of professional legal ethics to adequately police conflicts of interest in bankruptcy….”).

74 Comments from Jonathan Lipson to author on earlier draft (June 3, 2024) (on file with author).

75 Bill Rochelle makes even a better point: I would place no reliance on the percentage that a client’s billings represent…. The client may be small, but it may be one of a hundred clients of the firm’s biggest rainmaker. A bankruptcy lawyer would avoid pissing off the rainmaker’s client, because it would get back to the rainmaker. Or, the bankruptcy lawyer might curry favor with the rainmaker by going easy on the rainmaker’s client. Email from Bill Rochelle to author (June 1, 2024) (on file with author).

76 My buddy Joe Tiano is more skeptical than I am about the bargaining power of big institutional clients. “I doubt any law firm bullies Amazon or Ford or Apple or frankly any client paying a firm more than $5 million per year. I have no empirical evidence, just gut hunch.” Email from Joseph R. Tiano, Jr. to author (June 4, 2024) (on file with author).

77 See n. 34, supra, and accompanying text.

78 Lawyers don’t stop being fiduciaries just because some of their clients are dealing with a bankruptcy case.

79 Jonathan M. Seymour, Against Bankruptcy Exceptionalism, 89 U. CHI. L. REV. 1925, 1962 (2022).

80 I’m waiting for the Association of Corporate Counsel to take hold of this issue and run with it. When even the biggest clients lack leverage, then we’ll be even deeper into the “bankruptcy exceptionalism” against which Professor Seymour rails so eloquently.

81 Though I’m just not that important. See n. 15, supra.