Once again, we find ourselves scratching our heads about seemingly obvious law firm conflicts of interest, the independence of a so-called “independent” director and the adequacy of an “independent” investigation during a bankruptcy case. We asked our expert contributors to help us make sense of it all. Please read on for Part 1 of our series looking into the Examiners Report in the Silvergate Capital bankruptcy case. Part 2 will delve further into the role of independent directors in the bankruptcy process.

Stephen Lubben

Professor, Seton Hall University of Law

What was the point of it?  That is what we might ask about the pre-bankruptcy board maneuvers in Silvergate.  An independent director was appointed, and asked to investigate the company’s palpable governance and compliance problems.  But before she could do so, she was asked to vote with the rest of the board to approve an RSA and a corresponding plan that contained wide-ranging releases of insiders for all their pre-bankruptcy conduct.  In short, the investigation would come too late to make a difference.  But vote she did.

The new director then decided to use the debtor’s local Delaware counsel to conduct the investigation, and based the investigation on documents provided by the debtor’s long-standing New York counsel.  Not exactly a fresh set of eyes there. The board special committee’s report – the committee being comprised of just the new director – came out after the bankruptcy court had appointed an examiner, further underlining the pointlessness of the endeavor.  

In Silvergate, as in all such cases, the pre-bankruptcy investigation was presumably designed to ensure a smooth bankruptcy process.  But to achieve that end, the company needed to conduct a real investigation, with real independence.  Reviewing some documents spoon fed to the committee by the company’s counsel, while the committee uses the same counsel that the soon-to-be debtor intends to retain for its chapter 11 case saves a bit of money in the short term.  But in the long term, it defeats the entire reason for exercise, and shows a complete lack of respect for the DIP’s fiduciary duties.

The facile response is the DIP did not yet exist, and so did not owe any fiduciary duties.  Sure, but once those duties do arise, how can you justify releasing apparently viable claims?  That is, even pre-bankruptcy, a board has to anticipate the obligations that will soon become binding.

It can hardly be that the company (or rather its board) thought that any of these half-hearted moves amounted to anything more than a clear sweeping of issues under the rug.  The debtor here is liquidating – in such a case, what would justify releases of its former officers and directors? 

The independent director downplayed the significance of her vote in favor of the RSA, deeming the releases of officer and directors as mere “boilerplate.”  That is, so routine as to hardly be worth thinking about.  But how can a DIP– which as noted owes (federal) fiduciary duties to the estate – justify what can only be described as an out and out gift of estate assets?

The basic problem seems to be that the DIP’s fiduciary duties are not taken all that seriously anymore.  They are admitted and then ignored. 

In part this reflects how insignificant fiduciary duties have become under state law – where exculpation clauses and “cleansing devices” can defeat most any claim, in some states even intentional violation of law.  But there is no reason why chapter 11 fiduciary duties – the product of federal common law – should shrivel along with their state counterparts.

Perhaps modern corporate reorganization has truly become lawless, in the sense that there are little to no enforceable rules anymore.  In some regard, maybe this simply tracks the broader picture:  in a world where court orders are ignored, and due process dismissed out of hand, why should we expect anything different in the land of corporate reorganization?

The SEC promoted old chapter X under the Chandler Act because it believed that corporate reorganizations too often swept viable claims against officers and directors under the rug.  That such claims are today routinely released and ignored suggests that we are right back to that moment.  If the industry – bench, bar, and advisors – does not clean up its act, Congress might eventually wake up and do it for us.

**Stephen J. Lubben holds the Harvey Washington Wiley Chair in Corporate Governance and Business Ethics at Seton Hall University School of Law. His books include The Law of Failure: A Tour Through the Wilds of American Business Insolvency Law (2018) and To Protect Their Interests: The Invention and Exploitation of Corporate Bankruptcy, which is being published by Columbia University Press later this year.  Lubben previously practiced with a major global firm and wrote a column for the New York Times’ DealBook section.

Bruce Markell

Professor, Northwestern Pritzker School of Law

“Quis custodiet ipsos custodes?” loosely translates as “Who will watch the watchers?”  It is a Latin saying almost 2,000 years old, coming from Juvenal’s Satires.  But why lead with it?  Well, among other things it shows that humanity throughout the ages has had a deep suspicion about the credibility and fidelity of the independence of those hired to investigate claims against powerful insiders.

The machinations at Silvergate Capital renew this skepticism.  The facts are basic:  a single person “Special Investigation Committee” (SIC), tasked with investigating the debtor and its insiders, hires the debtor’s lawyers.  The results were predictable:  the SIC found that claims against insiders “lacked credibility,” were weak, and that the estate should give releases to the insiders to foreclose the estate from pressing such claims.

A later court-appointed examiner, however, found that hiring the debtor’s counsel undermined the SIC’s independence (duh), and that (without necessarily connecting the dots) the SIC essentially did a shoddy job, and in recommending releases for insiders.  The examiner’s report detailed critical omissions (no estimation of possible settlement value of claims recommended to be released), and identified conclusions reached without reason.

Add to this the fact that the SIC didn’t check conflicts when it hired the debtor’s lawyers, and didn’t get a written retainer.  Small wonder that the SIC’s report raised eyebrows when issued.

The integrity of investigators is always an issue, and it is especially important in insolvency matters.  While the basic presumption of Chapter 11 is that fraud and malfeasance are not sufficiently prevalent among debtors to require mandatory appointment of a trustee in every bankruptcy case — that was the basic reason old Chapter X was tossed in 1978 — this presumption isn’t irrebuttable. Fraud happens.  Greed and fear impair judgment. 

In any insolvency, creditors suffer, receiving a small portion of their claims.  This pain, however, can be eased if accompanied by assurances that no one else received more than their fair share.  Misery, after all, loves company.  With other creditors, the Bankruptcy Code equalizes pain through preference and fraudulent transfer recoveries.  These laws seek to fairly reallocate who gets what from the debtor’s estate.  With the debtor’s insiders, it is enforced by the specter of outside investigation through a trustee or examiner, and the application of bankruptcy and non-bankruptcy law designed to enforce fairness.

In Silvergate, these assurances weren’t given.  A law firm, bound by loyalty to the debtor but whose pay was at least partially controlled by insiders (remember ASARCO?), was asked to stand on both sides of the issue.  That raises, and raised, questions about impartiality and favoritism which the examiner rightly pointed out.

But opponents will complain that hiring outsiders costs more.  Maybe, if there really is no skullduggery afoot.  But if there are problems, do you really want those close to the situation (and who might have stopped it or at least reported it) to have the final say on the matter?  Exhortations that costs “to prove what we already know” are wasteful simply ring hollow.

As noted by the opening quotation, questions regarding the trustworthiness of investigators are eternal.  And that’s why the standard for investigators and judges is and should be the appearance of impropriety, not actual impropriety.  To be trusted and effective, the insolvency system must project integrity and impartiality, and instill belief that those running the system possess those qualities.  Those who might possess even a whiff of partisanship or favoritism should be excluded from investigating and deciding the issues.  Otherwise, as in Silvergate, we again have to watch the watchers, and that, in the long run, is the more expensive proposition.

**Bruce A. Markell is the Professor of Bankruptcy Law and Practice, and Edward Avery Harriman Lecturer in Law at the Northwestern Pritzker School of Law in Chicago, Illinois.  He is a retired bankruptcy judge and a former member of the Ninth Circuit Bankruptcy Appellate Panel.  He is also a member of the Collier on Bankruptcy Board of Editors, a lifetime member of the American Law Institute, a fellow and former scholar in residence at the American College of Bankruptcy, a conferee of the National Bankruptcy Conference and a founding member of the International Insolvency Institute.

Nancy Rapoport [1]

Professor, UNLV School of Law

A while back, I wrote a piece for the CRC called Nuance or Necessity for Conflicts in Bankruptcy Cases?,[2] in which I pointed out that bankruptcy lawyers are still also bound by their own state ethics rules.  That essay involved two unusual applications for employment, and I pointed out:

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.[3] 

So here we are again with my almost-annual reminder that state ethics rules still apply to all lawyers with a bar card.  Here’s what triggered this reminder:  a proposed redacted Examiner report, opining on whether an independent director—and the law firm that she used—did a good enough job reviewing the investigation of a sole independent director.  The case is In re Silvergate Capital Corp.,[4] and the report involves not only whether the independent director should have used the same law firm that the debtors[5] were using, but also how good the independent director’s report actually was, and (in my mind) how difficult it might be to be truly independent.

The activities that the Special Investigation Committee (run by the sole independent director) was supposed to review had to do with whether the officers and directors[6] of Silvergate had appropriate safeguards in place when it came to how Silvergate had handled crypto trades and whether there should be causes of action against those people who had been involved in monitoring those trades.[7]  Silvergate hired Law Firm A as its counsel, both for regulatory advice and advice about board governance, and then for its chapter 11 filing.  In addition to approving Law Firm A as main counsel, Silvergate hired Law Firm B as local counsel, pre-filing.  Not quite two years after the chapter 11 case was filed, Silvergate added an independent director and suggested that she work with Law Firm B on her investigation.  The independent director, who would normally have hired her own counsel, went ahead and hired Law Firm B “because [Law Firm B] had not been representing the Debtors for very long.”[8]

You see the problem already, right? In Delaware, the concurrent conflicts rule is Rule 1.7, which provides, in part, that

(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…. [exceptions to Rule 1.7(a) omitted]

So: the law firm for the special investigative committee investigating the behavior of officers and directors and employees of Silvergate is also one of the law firms representing … Silvergate.  Not good.  The examiner found, essentially, that the independent director, though actually independent, was hampered in her investigation in part by the conflicting loyalties of Law Firm B:

[Law Firm B], as Debtors’ counsel, was obligated under its engagement letter to solely represent the Debtors and prosecute the plan, which at the time of [the independent director’s] investigation, included releases of directors and officers. [Law Firm B]’s activity largely consisted of reviewing information provided by [Law Firm A] and [Law Firm B] did not seek to expand the [Special Investigation Committee]’s fact finding beyond the recycled information.[9]

Here’s the easy way to determine what kind of a conflicts problem you have:  if a lawyer is dealing with the confidences of a former client (Model Rule 1.9) or of a prospective client (Model Rule 1.18), there’s no issue with the lawyer’s duty of loyalty.  That duty only kicks in with current clients (Model Rule 1.7).  For current clients, you have both a duty of loyalty and a duty of confidentiality.  For former or prospective clients, it’s just an issue of whether you are risking using or revealing any confidential information when you take on a new matter.  But if a prospective client becomes a current client, then we’re in Rule 1.7 territory.  In addition to protecting confidential information, a lawyer would have to ask, “would I be tempted to pull my punches on behalf of Client A while also representing Client B”?  And that’s the situation that we have here.  Because Law Firm B’s job was to represent the Debtor (including trying to get a plan confirmed—a plan that had certain officer and director releases in it), it couldn’t also help the SIC investigate whether the officer and directors had done something that would have made such releases inadvisable.  There’s no way to use consent to get around that type of conflict.

There’s more in the Examiner’s report to consider, and it’s worth reading.  For someone like me, who is interested in serving as an independent director, it’s also a cautionary tale.[10]  Psychologically speaking, it’s not that easy to push back after being appointed to a board.  There are literally hundreds of reasons[11] that our brains tell us to go easy on those who have given us an opportunity to serve.[12]  I’ll bet that, if the independent director been asked, “are you sure that you want to use Silvergate’s law firm, given that you’re going to be looking for things that Silvergate’s people did wrong?,” she’d have chosen another firm.  The Examiner ticked off several issues that the independent director missed, concluding with the observations that “… the SIC’s use and reliance on the Debtors’ professionals colored its independence; (3) the SIC’s investigation had significant gaps and was not sufficiently thorough; and (4) the analysis set forth in the Report does not support the reasonableness of its conclusions with respect to potential claims of the estates.”[13]  The lesson?  Find a way to remind yourself to act independently, in spite of the psychological pressures that independent directors face.

[1] © Nancy B. Rapoport 2025. All rights reserved.

[2] Nancy B. Rapoport, Nuance or Necessity for Conflicts in Bankruptcy Cases?, Creditor Rights Coalition (June 5, 2024), at https://creditorcoalition.org/special-feature-professor-nancy-rapoport-on-recent-disqualification-decisions/.   

[3] Id.

[4] United States Bankruptcy Court for the District of Delaware, Case No. 24-12158-KBO, Doc 634-1 (4/4/05) [hereinafter Examiner’s Report].

[5] Yes, more than one debtor, but that point isn’t pertinent to my discussion.

[6] And others.

[7] If you’re wondering whether FTX reared its head in any of this, you’d be right.

[8] Examiner’s Report at 12.

[9] Id. at 17.

[10] Useful articles for anyone considering such a role include Claire Hill & Yaron Nili, Independence Reconceived, 2023 Colum. Bus. L. Rev. 589; Jared A. Ellias, Ehud Kamar & Kobi Kastie, The Rise of Bankruptcy Directors, 95 S. Cal. L. Rev. 1083 (2022); and (she says, immodestly) 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. 45 (2024).

[11] For an exceptionally good book on many of these cognitive errors, see Jennifer K. Robbennolt & Jean R. Sternlight, Psychology for Lawyers: Understanding the Human Factors in Negotiation, Litigation, and Decision-Making (ABA Book Publishing 2021).

[12] Email me if you want to see Co-Counsel’s AI-generated list of psychological pressures affecting director independence.

[13] Examiner’s Report at 38.

**Nancy B. Rapoport is a UNLV Distinguished Professor, the Garman Turner Gordon Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas, and an Affiliate Professor of Business Law and Ethics in the Lee Business School at UNLV.  

Al Togut

Togut, Segal & Segal LLP

For fifty years, I have specialized in bankruptcy law and have served as counsel to the debtor, official committee, or principal owner in some of the largest and highest profile chapter 11 cases including Enron, General Motors, Chrysler, American Airlines, and Westinghouse, to name just a few.  I have lectured and written extensively about ethics in the conduct of bankruptcy cases.  I have served on many ethics panels and for three years, I co-chaired the Chapter 11 Commission of the American Bankruptcy Institute that studied Chapter 11 and made recommendations for its improvement.  Suffice it to say, I have seen it all over my long career.

Especially in the early years of the Bankruptcy Code, conflicts were not taken seriously.  A conflicted party would simply disclose the conflict, no one in the case would object, and the representation was allowed.  Things changed when a partner from a major law firm was indicted, convicted and incarcerated for failing to disclose connections he had to the case.  And for a while, conflicts were taken very seriously and dealt with appropriately.

With the passage of time and as memories dim, the limits are again being tested.  Today, there are examples of law firms with glaring conflicts that have the Debtor hire independent directors who they believe somehow cures the conflict.   But some of these “independents” have not been so independent.   When “independent directors” are hired in case after case at the suggestion of the same law firm, they are grateful and want that law firm to recommend them again.  They want to be hired for more cases.  This is not necessarily compatible with what should be their only duty as independents:  to act independently.  And having independent directors doesn’t solve the problem of the law firm having conflicting loyalties between clients of the firm.

To be truly independent, an Independents Committee needs its own counsel.  The debtor’s law firm has a preexisting allegiance and duty to the debtor.  Thus, if the independents also hire the Debtor’s lawyers to represent them, it is difficult for these lawyers to only have a duty to the independents.   Quite simply, debtor’s counsel should not also be counsel to the Independent Committee.  There are plenty of firms available for this job whose only allegiance will be to their single client.

Conflicts by themselves are not a bad thing and can be readily addressed.  It’s often easy to do.  The best practice is to bring in independent counsel to deal with the conflict matters.  Not only does this lend credibility to the process, but it is a safeguard for the Debtor’s professionals.  It protects them from charges of impropriety and liberates them to act freely.

** Since Mr. Togut formed the firm of Togut, Segal & Segal LLP in 1980, he has served as counsel to the debtor, official committee, or principal owner in some of the largest and highest profile chapter 11 cases. Mr. Togut is a Fellow of the American College of Bankruptcy, a Fellow of the International Insolvency institute, co-Chair of the Commission of the American Bankruptcy Institute (“ABI”) that studied the reform of chapter 11, and past Officer and ABI Director and Chair of its New York City program;  he also served on the ABI’s fee-study commission that studied professional fees in chapter 11 business bankruptcy cases.  

Copyright Creditor Rights Coalition 2025