2005 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit

10-13-2005 

# In Re: C ongoleum C orp

P r e c e de nt i al or N on-P r e c e de nt i al : P r e c e de nt i al D ocke t N o . 04-3609

F o llow thi s and a dd it ion al work s at : http://d i git alc ommon s .l a w . vi ll anova . e du/thir dc ir c uit_2005

Thi s de c i sion i s br ou ght t o you for f r e e and ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. It h as be e n a c c ept e d for inclusion in 2005 D e c i sion s b y an authori z e d a dmini s tr at or of V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. F or mor e inform at ion, p le as e c ont a ct Be n j amin

. C arl s on@l a

w . vi ll anova . e du

. Re c omme nde d C it at ion

" In Re: C on g o le um C orp " (2005). 2005 D e cisio n s . P ape r 296. http://d i git alc ommon s .l a

w . vi ll anova . e du/thir dc ir c uit_2005/296P RE CE DE NT I AL
UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT

N o. 04- 3609

I N R E: CO NG OLEU M CO RP. , ET AL.
CEN TUR Y I ND EM NI TY C OM PAN Y, AS SUCC ESS OR TO CCI I NSU RA NC E CO M PAN Y, AS SUCC ESS OR TO IN S U R A N C E C O M P A N Y O F N O R T H A M E R IC A N ; A C E A M E R I C A N I N SU R A N C E C O M PA N Y f/k/ a CI GN A I NSU RA NC E CO M PAN Y; AC E PROPERTY & CAS UAL T Y I NS UR ANC E CO M P ANY f / k / a CI GNA P R O P E R T Y & C A S U A L T Y IN S U R A N C E C O M P A N Y , A p p e llan ts vs. CO N G O LEU M CO RPO RA TI O N ; CO N G O LEU M SA LES,

I NC. ; CONGO LE UM F I S CAL, I NC.

____________ APP EAL F ROM THE UNI TE D ST ATE S DI S TRI CT C OURT

FOR TH E DI STRI CT O F NEW J ERSEY (D

. C

. C iv. N o . 0 4 -cv -01 7 0 9 ) D i s tr i ctJ udge: H onor abl e St anl eyR

. C hes l er

____________ A r gued J ul y15, 2005 B efore: S L O V ITE R , M cK E E and W E IS, C i rcui tJudg es.

Fi l ed O ct ober13, 2005

____________T a n c r e d V. S c h i a v o n i , E s q u i r e ( AR GUE D) Jo n atha n J. K im , E sq u ir e O’ M e l v e n y& M y e r s LLP 7 T im es S q u are T i m es Squar e Tow er N ew Y or k, N ew Y or k 10036
M artyF

. S iega l, E sq u ir e Si egal & N api erkow s ki 22 0 L ake D ri ve E ast C herr yH i l l , N ew J er s ey08002
L eo n ard P

. G o ldb erg er, E sq u ir e W h i t e & W i l l i a ms LLP 1800 O ne Li bertyPl ace Phi l adel phi a, PA 19103
A t t orney s forA ppel l ant s C enturyI ndemni tyC om pany ; A ce A m e ric a n In su ra n c e C o m p a n y ; A c e P ro p e rty& C a su a lty I ns ur ance C om pany Ri c h a r d W. Hi l l , E s q u i r e ( AR GUE D) R ac h el L

. D iehl, E sq u ir e K ev in J. L icciard i, E sq u ir e M c Ca r t e r& En g l i s h , LLP FourG at ew ayC ent er 100 M ul berr ySt r eet N ew ark, N ew J er s ey07102
Ke r r yA. Br e n n a n , E s q u i r e ( AR GUE D) R icha rd L

. E p li n g , E sq u ir e Pi l l s b u r yW i n th r o p Sh a w Pi t t ma n LLP 1540 B r oadw ay N ew Y or k, N ew Y or k 10036
Paul S. H ol l ander , E s q. O ki n, H ol l ander& D eLuca O ne ParkerPl aza 12 Fl oor th For tL ee, N J 07024C o n g o le u m C o rp o ra tio n v . A c e A m e ri c a n In s . C o ., 1 etal

. , Super i orC our tof N ew J er s ey , L aw D i v isi o n, M i ddl es ex C ount y , D ocketN o. M I D

- L 8908- 01.

W e take jud ici al no ti ce o f th e state c o u rt 2 pr ocee d i n g s i n s o f

a ra s th e ya r e r e l e v a n th e r e . Se e Fu rn a r i v. W ar den, A l l enw ood Feder al C orr ect i onal I ns t

. , 218 F. 3d 250, 255 ( 3d C i r . 2000) ; I n r e I ndi an Pal m s A s s ocs . , L t d. , 61 F. 3d 197, 205 ( 3d C i r . 1995) ( concl udi ng that judi ci al not i ce c an be t aken of cert ai n fac t s s uch as that a docum ent w as fi l ed, a pos i t i on t aken, an 3 A t t orney s forA ppel l ees C ongol eum C orpor at i on, C ongol eum Sal es , I nc. , C ongol eum F i s cal , I nc. and G i l bertH ei nt z & Ra n d o l p h , LLP

____________ OP I NI ON

____________ W E I S, C i r cui tJ udge.

I n th i s p r e - p a c k a g e d Ch a p t e r 1 1 r e o r g a n i z a t i o n , we h o ld tha t evid en ce o f p re-p eti ti o n co n d u ct in this c ase b y a law firm i s r el evantt o a r evi ew of a de bt or ’ s appl i cat i on t o r et ai n the fi r m as s peci al i ns ur ance couns el

. W e concl ude thatthe bankrupt cyj udge s houl d nothave gr ant ed the appl i cat i on her e. T he fi r m had ac t ed as couns el for the debt or pr e- pet i t i on i n negot i at ing s ett l ement arr ang ement s w i th as bes t os i nj urycl ai m ant s r epr es ent ed by att o rne y s w h o w ere co -co u n sel w ith the f irm in insu ran ce m att ers forthos e s ame cl ai m ant s . W e conc l ude thatconfl i ct s exi s t ed w hi ch pr e c l u d e d th e f

i r m’ s r e t e n t i o n u n d e rth e Rul e s o f Pr o f e s s i onal C o n d u c t a n d th e B a n k ru p tc yC o d e .

Faci ng near l y100, 000 cl ai m s fori nj urycaus ed by a sb e sto s in its p ro d u c ts a n d th e e x h a u stio n o f its p rim a ryliab ili ty i ns ur ance cover age, C ongol eum fi l ed a decl ar at oryj udgm enti n the S up eri or C ou rtof N ew Jer seyi n 2 00 1 agai nst a nu m ber of ex cess c a rrie rs. T h e c o m p lain t w a s f iled b y th e law f

irm o f D u g h i, H e w it 1 & Pal l atucci , w hi ch had r epr es ent ed C ongol eum i n i ns ur ance m at t ers for m ore than t en y ears . 2a d m iss io n o r a lleg a tio n m a d e “ a s lo n g a s it is no t u n f a ir to a p a rty t o d o s o a n d d o e s n o tu n d e r mi n e th e tr i a l c o u r t ’ s f a c t fi ndi ng a u th o ri ty.”)

. C ongol eum C orpor at i on, C o ngol eum S al es , I nc. 3 a n d C o n g o leu m F isc a l, In c . f iled f o r ba n k ru p tcy. W e w ill re f e r to thos e ent i t i es as “C ongol eum. ”

Pr e- pac k a g e db a n k ru p t c i e s e mpl oy i ng a cha nnel i ng 4 i nj unct i on ar e notel i gi bl e forthe “cr am dow n” pr ovi s i on cont ai ned in 1 1 U .S .C

. § 1 1 2 9 (b )(1 ) w h ich a llo w s th e b a n k ru p tcy co u rt to c o n f irm a p la n o f

re o rg a n iza tio n o v e r c re d ito rs’ o b jec tio n s in c e rt a in c ir c u m s ta n c e s . 4

W hi l e thatl i t i gat i on cont i nued, C ongol eum s ought 3 r el i ef i n the B ankrupt cy C our t i n a C hapt er 11 pr e- packa ged pl an of r eor gani zat i on des i gned t o channe l exi s t i ng and futur e as bes t os cl ai m s t o a trus t as author i zed by11 U

. S. C

. § 524( g)

. A ppr oval of the pl an w oul d enabl e C ongol eum t o pr es erve i t s as s et s and cont i nue i n bus i nes s beca us e the trus tw oul d as s um e it s as bes t os l i abi l i ty . Sect i on 524( g) of the B ankrupt cyC ode r equi r es that75% of curr ent as bes t os cl ai m ant s appr ove a pl an of r eor gani zat i on befor e a c hannel i ng or derm aybe i s s ued. A s a r es ul t , garner i ng supp ortfrom a l arge nu m ber of cl ai m ants i s cruci al t o the succ ess o f a p la n . A uni que fe atur e o f a s b e s t o s p e r s o n a l i n

j u ryl i t i gat i on i s the fa ct that a sm al l gr oup of l aw fi r m s r epr es ent s hundr eds of tho usand s of plai nti ffs. A no ther notabl e aspect i s that, becau se overt i m e theym ayhave be en expos ed t o asb est os i n var i ous env i ronm ents , som e of the i njur ed pers on s m ay hav e cl ai m s agai nst a n u m b e r o f

d e f e n d a n ts

. T he r eali ti es of s ecur i ng favor abl e vot es fr om thous ands of cl ai m ant s t o m eetthe 75% appr oval r equi r ement for ces debt or s t o w or k cl os el y w i th the fe w att orney s w ho r epr es ent l ar ge number s of i nj ur ed cl ai m ant s . A pr epac kaged pl an of r eor gani zat i on acc ept abl e t o the debt or m us tbe s at i s fac t oryforthe claim an ts as w ell an d , co n seq u en tl y , ex tens ive n eg o ti ati o n s are 4 n e c e s s a r y.11 U

. S. C

. A

. § 524( g) pr ovi des forthe bankrupt cy 5 channe l i ng i nj unct i on and s ubs ect i on ( 2) ( B ) cont ai ns the r equi r ement s forthe i nj unct i on; i tr equi r es that–

( i ) the i nj unct i on i s t o be i m pl ement ed i n connec t i on w i th a trus tthat , pur s uantt o the pl an of r eor gani zat i on –

(I ) i s to a s s u m e th e lia b iliti e s o f a d e b to r ...; ( I I ) i s t o b e f

u n d ed i n w hol e ori n par tby the securi t i es of

1 o r m ore deb t ors i nvol ved i n s uch pl an a n d b yth e o b lig a tio n o f s u c h d e b to r o r d e b to rs to m ake f utur e pay m ents , i ncludi ng divi den ds; ( I I I ) i s t o ow n, or by the exer ci s e of ri g h ts grant ed unders uch pl an w oul d be ent i t l ed t o ow n i f s peci fi ed cont i ngenci es occur , a maj or i tyof the vot i ng s har es of – (aa ) ea ch su ch d eb tor;

( bb) the par entcorpor at i on of ea ch s uch debt or ; or ( c c ) a s u b s i d i a ryo f

e a c h s u c h d e b t or thati s al s o a debt or ; and ( I V ) i s t o us e i t s as s et s ori ncome t o paycl ai m s and d e m a n d s ; ... 1 1 U .S .C .A . § 5 2 4 (g )( e m p h a s is a d d e d ). 5 I. I n thi s cas e, negot i at i ons betw een the debt orand coun sel forpl ai nt i ffs pr oduced a pr opos al thati nvol ved the cre ati o n o f a tru st fu n d ed p ri m aril yb yp roc ee d s fro m C o n g o leum ’s i ns ur ance carri ers to pa yfors ett l ement s of exi s t i ng, as w el l as f u tu re a sb e sto s p e rso n a l in ju ryc laim s. C o n g o leu m w a s to contr i but e t o the trus ta $2. 7 m i l li o n p rom i s s arynot e pay abl e t en y ear s af t e rc o n f i rma t i o n a n dA B I , C ongol eum’s par entcorpor at i on, w a s to c o n trib u te $ 2 5 0 ,0 0 0 c a sh a n d th e p led g e o f its sh a re s in C o n g o l e u m t o s e c u r e C o n g o l e u m ’ s p r o m i s s o ry n o t e . N o t a b l y, n e ith e r C o n g o leu m n o r rela ted e n tit ies w e re re q u ire d to c o n trib u te e q u ityto th e tru st. 5

T h e p re -p e tit io n a c tiv ity th a t o c c u rre d in th is c a se isPerr yW ei t z i s a par tner i n the l aw fi r m of W ei t z & 6 L uxenber g, P. C

. J os eph R i ce i s a partneri n the l aw fi r m of M ot l ey R i ce , LLC. Th o s e two f i r ms r e p r e s e n th u n d r e d s o f th o u s a n d s of asbest os cl ai m ant s . W ei t z and Ri ce e xecut ed the C l ai m ant A greem ent as repr esent at i ves of part i ci pati ng asbest os cl ai m ants

.

T he set t l em ent am ou nts w ere assi gn ed as fo l l ow s: 7 (1 ) m e so th e lio m a – $ 1 0 0 ,0 0 0 ; (2 ) lu n g c a n c e r – $ 3 0 ,0 0 0 ; (3 ) o th e r c a n c e rs – $ 1 0 ,0 0 0 ; ( 4) L evel I I non- m al i gnantdi s eas e – $3, 000; and (5 ) L e v e l I – n o n m a lig n a n t d is e a s e – $ 1 ,0 0 0

.

6 fa i r l ytypi c a l of

tha ti n a nu mberof

a s be s t os pr e - pa c ka ge d pl ans. J os eph F

. R ice a n d P erryW eit z, tw o p lai n ti ff s’ l aw y ers, n eg o ti ated

6 a se tt lem en t of

n u m ero u s asb esto s claim s w ith C o n g o leum ’s couns el , G i l bert , H ei ntz & R andol ph, L L P ( “G i l bert ”)

. T he a g re e m e n t e m p lo y e d a m a trix to “ re so lv e a n d se ttl e ” th e a m o u n ts the var i ous cl as s es of cl ai m ant s w oul d r ece i ve as damages

. For ex am p le, m eso theliom a v ict im s w ere ea ch all o ca ted $1 0 0 , 0 0 0

. In contr as t , thos e w i th non- m al i gnanti nj ur i es w oul d r ece i ve $1, 000. 7

T o quali fyfo r co m p en sati o n , a p arti ci pat i ng cl ai m ant w a s requi red t o provi de evi den ce of i njury and exp osure to C ongol eum p roduct s . C l ai m s of the qual i fi ed part i ci pat i ng cl ai m ant s w oul d be s ecur ed t o 75% o f the mat r i x val ues and the r emai nderw oul d be tr eat ed as uns ecur ed cl ai m s . I n contr as tt o the cl ai m s of part i ci pat i ng cl ai m ant s addr esse d i n the s ett l ement agr eement , cl ai m s s ett l ed w i th a s epar at e gr oup of cl ai m an ts pr ep e titio n w o u ld b e s e c u re d in f u ll. II. T h e ro le G ilb e rt p la ye d in p re p a rin g th e p lan is c h a llen g e d in th is p ro c e e d in g . In O c to b e r 2 0 0 2 , P e rryW e itz r ecomm ended t hatC ongol eum re t ai n G i l bertt o as s i s ti n s ol vi ng i n s u r a n c e c o v e r a g e f

o rC o n g o l e u m ’ s m o u n t i n g a s b e s t o s l i a b i l i t y. G i l berts peci al izes i n i ns ur ance cover age di s put es and pr oductPerr yW ei t z’ s s ugges t i on thatC ongol eum cont act 8 G i l bertoccu rr ed in the m id st o f neg oti at i on s of cl ai m s agai nst C ongol eum byt w o i ndi vi dual s s uffe r i ng fr om m es othel i om a, M e s s rs . C o o k a n d A rs e n e a u lt. 7 li ab il itym att ers. I t se rv e s in a v a r ie ty o f c a p a c iti e s re late d to v a rio u s a sb e sto s m a ss to rt c a se s an d re p re se n ts de f e n d a n ts a s w e ll as cl ai m antand cr edi t orcomm i t t ees i n var i ous as bes t os b a n k ru p tc ie s .

Atth e t i me h e r e c o mme n d e d th e f i r m t o Co n g o l e u m, W ei t z had e xi st i ng co- couns el r el at i ons hi ps w i th G i l berti n other asb esto s related p roc ee d ing s. T h e arran g em en ts w ere that G il b ert 8 w o u ld re p re s e n t th e c la im a n ts in s e e k in g re c o v e ry f ro m th e ins u rers o f a s b e s to s d e f

e n d a n ts

. G ilb e rt d e sc rib e d its w o rk a s c o -c o u n se l w ith W e itz as pr ovi di ng: “ in su ra n c e -re late d a d v ice to c e rta in

cl ai m ant s i n as bes tos and other c o n tex ts . [G ilb e rt] re p re se n ts c e rta in asbes t os - r el at ed bo d il y injury c la im a n ts in p ro c e e d in g s a g a in st a pr i m ary i ns ur erw i th r es pectt o that in su re r’s c o v e ra g e o b lig a tio n s . . . in pu rs uing cov e rage cl ai m s agai nst i ns ur er s . . . and i n pur s ui ng cover age f ro m in s u re rs o f s im ila r d e f e n d a n ts .”

G ilb e rt e x p lain e d th a t itd id n o t re p re se n t th e in d iv id u a l cla im a n ts w ith re sp e c t to th e e sta b lish m e n t o f th e ir to rt c laim s, “ b u t o n lyw ith r es pectt o t he col l ect i on of i ns ur ance m oni es t o paycl ai m s thatm ay be es t abl i s hed. ”

O n February6, 2003, G i l bertent er ed i nt o a for m al re ten tio n a g re e m e n t to a d v ise a n d re p re se n t C o n g o leu m in e f f o rts t o n ego t i at e w i th clai m ants ’ cou nsel t o set t l e “pen ding asbest osr el at ed bodi l yi nj ury ” cl ai m s , and arr ange for the “t erm s of a ‘ pr epacka ged’ pl an of r eor gani zat i on. ” Forthes e s ervi ces , G i l bertw as t o r ece i ve a fi xed fee of $2 m i l l i on fr om C ongol eum. C ongol eumN o partyhas r ai s ed obj ect ion s to the fe es of $2 9 m ill io n p a y a b le to G ilb e rt a n d th e $ 1 m ill io n e a c h p a y a b le to W e itz and R i ce. T hat m att er i s not befor e us and w e do notrul e on i tat th is p o in t.
I n I n r e: C om bus t i on E ngi neer i ng, 295 B

. R

. 459 ( Ba n k r . D. N. J

. 2 0 0 3 ) ( v a c a t e d o n o th e rg r o u n d s , 3 9 1 F. 3 d 1 90 ( 2004 )), a pr e- packa ged as bes t os bankrupt cycas e, J os eph R i ce so u g h t a $ 2 0 m ill io n f

e e f o r h is p re -p e tit io n w o rk

. T h a t f e e w a s to be pai d by a corpor at i on aff i l i at ed w i th the debt or , b u t w as di s al l ow ed by the bankrupt cy j udge bec aus e R i ce ha d a conf l i ctof in ter e st.
In In re P ittsb u rgh C o rnin g , 3 0 8 B

. R

. 7 1 6 (B an k r. W

. D

. Pa. 2004) , the bankrupt cy court r efus ed t o al l ow a fe e of $30 m i l l i on to be r ece i ved byG i l berti n r epr es ent i ng the as bes t os cl ai m ant s ’ comm i t t ee. T he j udge found G i l berthad a co nfl i ctof i nt er es ti n t hatpr e- packa ge as bes t os pr ocee di ng. 8 al s o pai d Perr yW ei t z and J os eph R i ce $1 m i l l i on eac h forfee s and 9 expens es th ey “i ncurr ed orm ayi ncuri n connec t i on w i th” n e g o tia tin g th e p re -p a c k a g e d p la n .

In its lette r o f

re ten tio n , G ilb e rt d isc lo se d to C ongol e u m i t s ma n yr e p r es ent at i ons i n the as bes t os fi el d, i ncl udi ng th a t ith a d b e e n re tain e d to re p re se n t in d iv id u a l to rt c laim a n ts “ to p rov ide le g a l a d v ice w ith resp ec t t o insu ran ce m att ers.” G il b ert ex p lai n ed that it s “c o -co u n sel w ith resp ec t t o m an yo f th ese m att ers is [ W e itz].” G ilb e rt a lso sta ted th a t it

“r epr es ent s oth er cl i ent s , notl i s t ed her e, that ar e orm aybe adve r s e t o the [ sic ] C o n g o le u m w ith re sp e c t to a sb e sto s re late d c laim s. G H R w ill cont i nue t o r epr es entthes e and other si m i l arl ysi tuated cl i ents i n these capa ci t i es i n the futu r e. . . . I n l i ghtof the Fi r m ’ s r epr es ent at i on of enti t i es th a t a r e p o te n ti a ll y a d v e rse to Co n g o l e u m i n o th e rma t t e r s , GHR9 c a n n o t p ro v id e a n yleg a l se rv ic e s to C o n g o leu m th a t co u ld im p a ir its a b ili tyto re p re se n t f

u llyits c o rp o ra te and othercl i ent s . C o ngol eum agr ees thatG H R m ay cont i nue t o r epr es entor t o undert ake to r epr es entexi s t i ng or n e w c lien ts a s d e sc rib e d a b o v e o r in otherm at te r s , even though the p o s itio n s ta k e n b yo th e r c lien ts in thos e mat t er s m aybe adverse t o the po si t i on s t aken byC on go l e um i n those o r o th e r m a tters

. C o n g o leu m w ill n o t, in [ sic] th e b a sis of G H R ’s re p re se n tatio n o f

th e m , o b

jec t to G H R ’ s cont i nui ng orundert aki ng the re p re se n tat io n o f

o th e r c lien ts in m att er s w her e the pos i t i ons ta ken by s uch cl i ent s ar e adve r s e t o thos e t aken byC ong o le um i n thos e orother m att er s . ”

In a d d iti o n to n e g o tiatin g o n C o n g o leu m ’s b e h a lf w i th cl ai m ant s ’ couns el t o s tructur e the cont empl at ed bankrupt cy r eor gani zat i on, G i l bertpart i ci pat ed i n the dec l ar at oryj udgm ent act i on i n N ew J er s eys t at e court , al though the D ugh i f ir m is the le a d tr ia l c o u n s e l in th a t p ro c e e d in g .

C ongol eum fi l ed i t s r eor ganiza t i on pet i t i on on D ece m ber31, 2003 and on J anuary 2 3, 2004 appl i ed for bankrupt cycourtappr oval t o r et ai n G i l bertas “s peci al i ns ur ance c o u n se l.” T h e a p p lica tio n sta ted th a t G ilb e rt “ w o u ld b e p rim a rily r es pons i bl e fors tr at egi c advi ce on i ns ur ance i s s ues , i ncl udi ng but notl i m i t ed t o i ns ur ance-rel at ed s ett l ementnegot i at i ons , and the r epr es ent at i on of the D ebt or s w i th r es pect t o i ns ur ance i ssues ar i s i ng i n t he cont extof the C hapt er11 C as es . ”

T h e a p p li ca tion co n ti n u ed , “G H R w as th e p ri m ary couns el t hatnegot i at ed w i th r epr es ent at i ves of as bes t os pl ai nt i ffs t o cr eat e t he structur e of the D ebt or s ’ Pl an. G H R al s o r epr es ent ed C ongol eum i n negot i at i ng and dr aft i ng as bes t os s ett le m ent10 agreem ents tha t li qu i dated nu m erous cl ai m s ass ert ed ag ai nst C ongol eum i n the t or ts y s t em. T h e sett l ementof num er ous as bes t os cl ai m s al l ow ed the D ebt or s t o negot i at e th e P lan, w hi ch cont empl at es thatthe pr i m aryas s et s dedi cat ed t o payas b estos c la im s w ill b e C o n g o le u m ’s ri g h t to re c e iv e in s u ra n c e p ro c e e d s .”

T h e f o ll o w ing serv ices “ am o n g o ther thin g s” w ere to b e p ro v id e d b yG ilb e rt:

“( a) advi s i ng and r epr es ent i ng the D ebt o r s i n i n s u r a n c e - r e l a t e d s ett l em en t negot i at i ons and medi at i ons w ith in su re rs a n d o th e r p a rties ; (b) pu rs uan t t o r equ est of the D ebtor s, a d v isin g a n d a ss istin g th e D e b to rs in con sul t at i on s w i th p art i es- i n-i nter est r e g a r d in g u n r e s o lv e d , p o te n ti a lly a v a ilab le in su ra n c e c o v e ra g e ; ( c) advi s i ng the D ebt or s as t o the ap p rop riate step s n ec essa ryto as sert c l a i ms a g a i n s ta n d o b t a i n p r o c eeds f ro m in su re rs; ( d) r evi ew i ng and an aly zi ng i nsur ance - r el at ed document s , dat a, app l i cat i on s, orders , op era t i ng r e po rt s, sc h e d u les a n d o th e r m a ter ials ; ( e) r epr es ent i ng the D ebt or s at hear i ngs conc e rni ng i ns ur ance - r el at ed iss u e s in th e b a n k ru p tcy ca se ; (f) ad v isi n g an d assistin g the D eb tors i n pr epar i ng appr opr i at e i ns ur ance r e l a t e d l e g a l p l e a d i n g s a n d p r o p o s ed i ns ur ance-relat ed or der s i n t he b a n k ru p tcy ca se ; ( g) purs uantt o r eques t s of the D ebt or s , advi s i ng and as s i st i ng the D ebt or s w i th r es pect t o i ns ur ance -11 rel at ed i s s ues i n connec t i on w i th the for m ulat ion n e g o t i ati o n and confi r m a t i on of a p l a n of re o rg a n iza tio n ; (h) pur s uantt o r eques t s of the D ebt or s , as s i s t i ng and advi s i ng the D e b to rs g e n e ra llyw ith re sp e c t to i ns ur ance - r el at ed i s s ues dur i ng the C hapt er11 C as es , and s uch other services as m aybe in the besti nter est of the D ebt or s ; and ( i ) pr epar i ng appr opr i at e pl eadi ngs and or der s , conduct i ng di s covery , and rep rese n ti n g C o ngol eum i n t he C o v e ra g e L iti g a tio n (if

th e a u to m a tic s t ayi s notm ai nt ai ned) ori n any adver s ar i al pr ocee di ng r el at i ng t o the det erm i nat i on of i ns ur ance r i ght s or col l e c t i on of insurance cl ai m s; pr ovi ded, how ever , thatthe D ebt o rs ant i ci pat e that[D ughi ] w il l cont i nue to a c t as p rim a rylit ig a tio n c o u n s e l in the C o v e ra g e L it igation an d G H R ’s r ol e i n thi s r egar d w il l c ons i s tof coor di nat i ng the C over age Li t i gat i on w i th i n s u r a n c e s e t t l e me n te f f o r t s a nd as s i s t i ng [D ughi ] as r equi r ed. ” C ert ai n of C ongol eum’s l i abi l i tyi ns ur er s w ho had notpart i ci p ated i n the form ul at i on of the pl an obj ect ed t o the a p p lica tio n to re tain G ilb e rt. T h e ya lleg e d th a t G il b e r t w a s in c o n f li c t b e c a u se o f

th e d u ties it o w e d th e in d iv id u a l cla im a n ts it r epr es ent ed as co- couns el w i th W ei t z. T he i ns ur er s al s o poi nt ed out that the K enes i s G r oup, L L C ( “K enes i s ”) , a thi r d partyow ned 70% byG i l bertand hi r ed pr e- pet i t i on byC ongol eum t o s cr een c laim a n ts, h a d a lre a d yb e e n d isq u a lifie d f ro m b e in g re tain e d to re v iew c laim s in In re A C a n d S , In c ., 2 9 7 B .R . 3 9 5 (B a n k r. D . D e l. 2003) , a pr ocee di ng i n w hi ch G i l bert had been i nvol ved. T h ey ar gued thatG i l bert ’ s ext ens i v e rela t i ons hi p t o PerryW ei t z andI n r e: M arvel E nt ert ai nm entG r oup, 140 F. 3d 463 10 (3d C ir

. 1 9 9 8 ). 12 J os eph R i ce i n otheras bes t o s m att er s vi ol at ed both the di s i nt er es t ednes s r equi r ement of sec t i on 327( a) of the B ankrupt cy C o d e a n d th e R u les o f

P ro f e ss io n a l C o n d u c t. M o re o v e r, th e d e tails of the fe e arr angementbetw een G il b ert a nd W ei t z had notbeen d iscl o sed

. T h e insu rers also ask ed fo r disco v eryto f u rth er e x p lore G i l b e rt ’ s r e l a t i o n s h i p w i th o th e rp a r t i e s i n v o l v e d i n th e b a n k ru p t c y.

O n M arc h 1 , 2 0 0 4 , the b an k rup tcy j u d g e h ea rd ar gum enton C ongol eum’s appl i cat i on t o retain G i l bert

. T he U ni ted St at es T rus t ee appear ed and s t at ed thathe di d “notobj ect t o G i l bert H ei nt z’ r et ent i on. ” The T rus t ee c oncede d, how ever , that “[t ] her e ar e ce r t ai nl ypot ent i al confl i ct s . A nd w h en i t ’ s pot ent i al u n d e rM a r v e l , th e r e ’ s a we i g h i n g o f wh e th e r i t ’ s g o i n g t o b e c o me 10 actual ornot

. . . [a] nd w e nee d t o s ee w hathappens her e. ”

G i l bertcont ended thati t s conductpr e- pet i t i on w as n o t r e le v a n t to its e m p lo ym e n t as sp e c ial c o u n se l. Ita rg u e d th a t, as t o the mat t er s l i s t ed i n the appl i cat i on, the i nt erests o f t he i ndi vi dual s i t r epr es ent ed as co- couns el w i th W ei t z w ere al i gned w ith C o n g o le u m ’s in te re s ts to o b ta in re c o v e ry f ro m th e in s u re rs . T h e b a n k ru p tcy j u d g e g ra n ted th e a p p lica tio n to empl oyG i l bert , hol di ng that the s t andar ds s eti n s ect i on 327( e) of the B ankrupt cyC ode, r ather than thos e i n s ect i on 327( a) , appl i ed and, hence , the r equi r ement of di s i nt er es t ednes s of s ect i on 327( a) w as not pert i nent

. T he j udge not ed the di ffe r ence betw een pr e- and p o s t- p e titio n re p re s e n ta tio n a n d s a id ,

“ [ w ]h a tev e r else m a y h a v e g o n e o n in th e p re -p e tit io n n e g o tia tio n s, e v e n if G H R w a s b a d , b a d , b a d , n o w t o d a y, b o th th e D e b to r a n d G H R w a n t to p rese rve an d m ax im ize the D eb tor’s i n s u r a n c e a s s e t s . I ’ m no tmaki ng a fi n d i ng aboutw hetherG H R act ed im p ro p e rl yp re -p e titio n . I ’ m j us ts ay i ng thati ts pr e- pet i t i onK enes i s s ubcontr act ed i t s w ork t o T he 11 C l ear i nghous e L L C , an or gani zat i on ow ned byan i ndi vi dual w ho w as on l eave of abs ence fr om a pos i t i on as a par aleg al at Jos eph R ice’s law f

irm . K en esis p u rch ase d T h e C learing H o u se b ef o re b e g in n in g c la im s re v ie w w o rk f o r C o n g o le u m . 13 behavi orcannotcarrythe dayon a pos t

- pet i t i on r et ent i on appl i cat i on for di ffe r ents ervi ces . ” I n addi t i on t o the cha l l enge t o G i l bert ’ s r et ent i on, the in su re rs a lso c o n tes ted C o n g o leu m ’s e m p lo ym e n t o f K e n e sis G r oup, L L P as cons ul t ant s and cl ai m pr oces s or s . G i l bertow ned a 70% i nt er es ti n K enesis. C ongol eum had pai d $1, 678, 000 for K en esis’ w o rk sc ree n in g asb esto s claim an ts. C o n g o leum ’s 11 a p p lica tio n d e sc rib e d K e n e sis ’ w o rk p re -p e tit io n , ind ica tin g th a t it w oul d cont i nue t o r evi ew cl ai m s i t h ad p revi ous l ypr oces s ed and det erm i ned t o be def

i ci entt o det erm ine w h etherthe def ect s had b e e n c u re d . In a d d iti o n , the a p p lica tio n in d ica ted th a t K e n e sis w ou l d p erform con sul t i n g se rvi ces for C on go l eum ’s l aw fi rm s, in c lu d in g G ilb e rt a n d D u g h i.

O n A pr i l 5, 2004, ab outone mont h aft ergr ant i ng G i l bert ’ s appl i cat i on, the B ankrupt cy C our t hear d ar gum ent on the K enes i s appl i cat i on. I n r es pons e t o the obj ect i ons fr om C o n g o leum ’s i n su rers an d the U n it ed S tat es T rustee , the C o u rt deni ed the appl i cat i on. T he bankrupt cy j udge bas ed herdeni al on th e “ c o n c e rn th a t K e n e s is [ w a s] n o t d isin ter e ste d d u e to its r e l a t i o n s h i p wi th [ Gi l b e r t ]

. ” Th e j u d g e n o t e d th a t Ken e s i s had been i nvol ved i n “ne g o t i at i ng the C l ai m antA gr eement[pr ep e titio n ] a n d th a t f

o rm s th e b a c k b o n e o f

th e re o rg a n iz a tio n p la n . S o th e C o u rt f

in d s th a t th e yw e re a n d c o n tin u e to b e in v o lv e d in negot i at i ng the pl an. ”

T he bankrupt cy j udge furtherexpr es s ed conc ern that K enesi s m i gh thav e a con fl i ctof in t eres tw i th the deb t or becau se the paym enti tr ece i ved forpr e- pet i t i on s ervi ces m i ghtbe a p ref ere n ce . M o reo v er, th e c o u rtsh are d “the U

. S

. T rustee ’s c o n c e rn th a t K e n e sis is n o t d isin ter e ste d d u e to its re latio n sh ip w ith G H R

. T h e p rosp ec t th at G H R w o u ld b e re v iew in g the w o rk p ro d u c t o f

a n e n tity w it h s u c h a stro n g o v e rla p o f id e n tityis s til l14 m or e r eas on thatK enes i s does notm eetthe s t andar ds of 327. ”

T h e ins u rers ap p ea led th e ru li n g o n G il b ert’s r et ent i on. T he D i s tr i ctC our tconcl uded thatthe bankrupt cyj udge w as corr ecti n herrul i ngs on the al i gnm entof i nt eres t s and the appl i cat i on of sec t i on 327( e)

. T he di s tr i ctj udge comm ent ed that beca us e the i ns ur ance compani es w er e t he pri m ary s our ce of funds to p a y c laim a n ts, th e c a rrie rs “ h a v e e v e ryin ter e st in m a k in g it, to puti tbl unt ly , di ffi cul tt o confi r m thi s bankrupt cy , and that m ot i vat i on i s notl os ton the C our t

. ”

I n thei rappea l t o thi s C our t , the i ns ur er s r ai s e s ever al i s s ues i ncl udi ng: ( 1) w hetherthe D i s tr i ctC our terr ed i n aff i r m i ng the B an k rup tcyC o u rt’s de term ination that retaining G il b ert vi ol at ed nei therthe B ankrupt cyC ode nor the R ul es of Pr ofes s i onal C onduct ; ( 2) w hetherthe D i s tr i ctC our terr ed b y af fi r m i ng that s ect i on 327( e) of the B ankrupt cy C ode appl i ed r atherthan s ect i on 327( a) ; ( 3) w hetherthe D i s tr i ctC our terr ed i n notr eversing the B an k rup tcyC o u rt ’s find ing s o f fa ct an d co n clus ion s o f law w h ere the B ankrupt cyC our tnei therconduct ed an e vi dent i aryhear i ng nor al l ow ed di s covery ; ( 4) w hether the D i s tr i ct C our t err ed byfai l i ng to co n side r G il b ert’s eco n o m ic an d o th e r ti es to law y ers r e p r e s e n t i n g a s b e s t o s c l a i ma n t s wh o a r e a d v e r s e t o Co n g o l e u m; and ( 5) w hetherthe D i s tr i ctC our terr ed by af firmi ng the B ankrupt cyC o u rt ’s deni al of the i ns ur er s ’ M ot i on forJ udi ci al N o tic e . C ongol eum quest i ons w h etherthe i ns ur er s have sta n d in g to c h a llen g e th e re ten tio n o f sp e c ial in su ra n c e c o u n se l. III

. T h is is a c o re p ro c e e d in g p u rs u a n t to 2 8 U .S .C . § 157( b) ( 2)

. T he D i s tr i ctC our thad j ur i s di cti o n pur s uantt o 28 U. S

. C. § § 1 5 7 a n d 1 3 3 4

. We h a v e b e f o r e u s a f i n a l o r d e rwh i c h we r evi ew under28 U

. S. C

. § 1291. I n r e U ni t ed A r t i s t s T heatr e C o. V

. W al t on, 315 F. 3d 217 ( 3d C i r . 2003) ; I n r e: Pi l l ow t ex, 304 F. 3d 2 4 6 (3d C ir

. 2 0 0 2 ).

B eca us e w e ar e a c our tof appe al s, “tw i ce r emoved fr om the pr i m arytr i bunal , w e r evi ew both the fa ctual and the l egal d e te rm in a tio n s o f

th e d is tr ic t c o u rt f

o r e rr o r.” In re B H & P , In c ., 94 9 F

. 2d 13 00 , 1 3 0 5 (3d C i r. 19 91 )( qu oti ng U niver sal M i neral s,15 I nc. v. C

. A

. H ughes & C o. , 6 6 9 F .2 d 9 8 , 1 0 1 -0 2 (3 d C ir . 1 9 8 1 ))

. I n or der t o det erm i ne w hetherthe D i s tr i ctC our terr ed, w e r evi ew the b an k rup tcy co u rt ' s fin d ing s b y the st an d ard s the D istri ct C o u rt sh o u ld h av e e m p loy ed

. Id

. a t 1 3 0 6

. I V. A t th e o u tsetw e m u st co n sid er C o n g o leum ’s c o n ten tio n th a t th e in su re rs la c k sta n d in g to b rin g th is a p p e a l. C o n g o leum arg u es th at the i n su rers are n o t cre d it o rs of the d eb tor, ar e notper s ons aggr i eved bythe re te nt i on or der , and underthe m o re restri cted b an k rup tcystan d ard s, lack ap p ell ate stan d ing

. In s uppor tof i t s pos i t i on, C ongol eum ci t es T r avel er s I ns ur ance C o m p an yv . H

. K

. P o rt er C o m p an y , Inc

. , 4 5 F

. 3 d 7 3 7 (3d C ir

. 1 9 9 5 ) a n d In re : D yk e s , 1 0 F .3 d 1 8 4 (3 d C ir . 1 9 9 3 ).

A rticle III s ta n d in g n e e d n o t b e f in a n c ial a n d o n ly need be fai r l ytr ace abl e t o the al l eged i l l egal act i on. See M i l l erv. N i s s an M ot or A cce pt ance C orp. , 362 F. 3d 209, 221 ( 3d C i r . 2004) ( l i s t i ng t he el ement s of A r t i cl e I I I s t andi ng)

. I n the bank rup tc y f ield , h o w e v e r, w e h a v e a d o p ted a ju risp ru d e n tial ru le th a t li m its appel l at e s t andi ng t o per s ons orent i t i es thatar e aggr i eved byan or derw hi ch di m i ni s hes thei r pr operty , i ncr eas es thei rbur dens , or d e tr im e n ta lly a f

f e c ts th e irri g h ts . T ra v e le rs , 4 5 F .3 d a t 7 4 2

. W e ci t ed the s t andi ng di s t i nct i on i n In r e: C o m b u s t i o n E n g i n e e r i n g , I n c . , 3 9 1 F

. 3 d 1 9 0 ( 3 d C i r . 2 0 0 5 )

. We r ecogni zed the ac ute n ee d t o l i m i tappea l s i n bankrupt cycas es w h ich o ften inv o lve a m yri ad o f p arti es i n d ir ec tl y af fe cted b yev ery bankrupt cycourtor der

. C om bus t i on E ngi neer i ng i nvol ved a pr ep a c k a g e d C h a p t e r1 1 p l a n s i mi l a r t o th e o n e b e f o r e u s . We c o n c lu d e d th a t so m e o f th e in su re rs h a d a p p e llate sta n d in g b u t o n ly w i th r es pectt o the l i m i t ed group of i s s ues thataff ect ed them. I d. a t 2 1 7 -1 8

. H er e, the i ns ur er s ar e ent i t l ed t o s t andi ng even unde r the m ore res tri ct i ve st and ard app l i ed t o bank rupt cyp roce edings. T he r et ent i on of s peci al i ns ur ance couns el i s an impor t ant pr el i m i narym att erthat w i l l pr ofoundl yaff ectthe det erm i nat i on of the val i di tyof a pro p o s ed pl an a b in iti o . I ti s an i s s ue bas ed on pr ocedur al due pr oces s conce rns that i m pl i cat e t he i nt egr i ty of the b an k rup tcyco u rtp roc ee d ing as a w h o le. T h e ret en ti o n o f G il b ert as s peci al i ns ur ance couns el w i l l aff ect the r es ol ut i on of i s s ues that16 m aydi r ect l yaff

ectthe r i ght s of i ns ur er s and fai rnes s t o the asbest os cl ai m ants

.

C om bus t i on E ngi neer i ng and D ykes , on the other hand, w er e appe al s fr om fi nal or der s confi r m i ng pl an s of r eor gani zat i on . In T r avel er s , the obj ect i ons w er e di r ect ed atan o rd e r re in sta tin g c e rta in c laim s. In th e p re se n t c a se , th e a p p e a l is fro m an o rde r w h ich w il l aff ec t th e f

airne ss o f th e e n ti re bankrupt cypr ocee di ng, i ncl udi ng the det erm i nat i on of i s s ues s uch as thos e forw hi ch w e gr ant ed i ns ur er s t andi ng t o chal l enge a fi nal o rd e r i n C o m b u s tio n E n g in e e ri n g .

F u rth e r, itis e x tre m e lyim p o rta n t to re so lv e th is p re lim in a ry m a tte r n o w ; o th e rw is e , it m a yn e v e r b e a d d re s s e d

.

I n r e: M arvel E nt ert ai nm entG r oup, 140 F. 3d 463 ( 3d C i r. 1998) , pr es ent ed a c hal l enge t o ourj ur i s di ct i on i n an appe al fr om an or derr efus i ng the trus t ee’ s r eques tt o r et ai n a ce r t ai n l aw fi r m . W e tr eat ed t he bankrupt cyj udge’ s or deras fi nal , poi nt i ng out thati f w e di d nott ake j ur i s di ct i on atthatpoi nt , no “m ea n ingful r evi ew ” of the deni al of the appoi nt m entcoul d evert ake pl ace . I d. a t 4 7 0

. W e o b se rv e d th a t o n c e a p lan h a s p ro c e e d e d to co n firm ati o n , o rde rs i n v o lving reten ti o n o f p rof essio n als are unl i kel yt o g et t he att ent i on theydes erve. O nce a bankrupt cy r eor gani zat i on has been c om pl et ed, i tw oul d be unl ikely tha tthe pr ocee di ngs w oul d comm ence agai n fr om the begi nni ng t o corr ect pr el i m i naryi s s ues . I d. ; s ee a l s o I n r e: A m at ex C o rp., 7 5 5 F. 2d 1034, 1040 ( 3d C i r . 1 9 85) ( not i ng that“w ai t i ng unt i l a fi nal pl an i s appr oved mayw el l caus e s ever al y ear s of hea r i ngs and negot i at i ons t o be w as t ed”) ; I n r e: G I H ol di ngs , 385 F. 3d 313 ( 3d C i r . 2004) ( r evi ew i ng an or d er ap p oi nt i ng a trus t ee pr i ort o pl an confi r m at i on)

. A ddr es s i ng the chal l enges t o G i l bert ’ s r et ent i on at thi s s t age c om por t s w i th ourdi s cus s i on of the unli k eli h ood of r evi ew l at e i n a bankrupt cyi n M arvel as w el l as th e co n ce rn for fai r nes s and due pr oces s thr oughoutcom p le x bankrupt cy p ro c e e d in g s s u c h a s th is o n e .

In addit i on , cou nsel f o r t he insur ers has a res po nsi bil i ty , i f no ta du ty , t o alert th e C ou rtt o ethi cal con fl i ct s. R ul es governi ng pr ofes s i onal conductar e oft en vi ew ed as even17 m or e nec es s aryan d ap p l i cabl e i n bankrupt cycas es than i n other cont ext s . See 1 C ol l i er on B ankrupt cy ( 15 ed. ) ¶ 8. 01[1] ( “Thus th t he i m p o r t a n c e o f

a d h e r e n c e t o th e e th i c a l ru l e s , a s wel l as d is c lo s u re , in itia l a n d c o n tin u in g , c a n n o t b e o v e re m p h a s iz e d .” ).

T here are, of course, con cerns abo ut the tact i cal use of di s qual i fi cat i on m ot i ons to h ar as s oppos i ng couns el

. See R i char ds on- M err el l , I nc. v. K ol l er , 4 7 2 U

. S. 424, 436 ( 1985) ( di s qual i fica ti on of couns el i n a ci vi l , nota bankrupt cy appoi nt m ent )

. Si m i l ar l y , court s m us tbe ca ut i ous abouti nfr i ngi ng on the r i ghtof the debt ort o r et ai n couns el of i t s choi ce. N ev erthe less, the o b li g ati o n to en su re tha t pro fe ssion al ethics a re foll ow ed h as l e d co urt s t o rul e t hat coun sel has st and i ng t o rai se and cha l l enge une thi ca l p r ocedur es on the partof oppos i ng l aw y er s . See K evl i k v. G ol ds t ei n, 724 F. 2d 844, 848 ( 1 C i r . 1984) st (c iti n g c a se s fr o m th e C o u rts o f A p p e a ls fo r th e F o u rth a n d F if th C i r cui t s author i zi ng att orney s t o r eportethi cal con cer ns t o the c o u rt ). W e ra ise d , b u t d id n o t d e c id e , w h e th e r a “ m o tio n to d isqu a lif y m u st be b rou g h t bya f o rm er c li en t” i n In re : C o rn D eriva ti v es A n ti tru st L it igation , 7 4 8 F

. 2 d 1 5 7 , 1 6 1 (3d C ir

. 1 9 8 4 ). H ow ever , w e not ed, “ o n e of the i nher entpow er s of anyfede r al co u rtis th e a d m issi o n an d d isci p li n e of att o rne y s p rac ti cing b ef o re i t

. ” I d. at160.

T he D i stri ct C ou rt i n S chiffl i E m broi deryW orkers ’ P en sion F u n d v . R y an , B ec k & C o . , 1 9 9 4 W L 6 2 1 2 4 (D

. N

. J. 1 9 9 4 ), ci t ed then R ul e 8. 1 of the N ew J er s ey R ul es of P rof es s i onal C onduct , w hi ch r equi r ed l aw y er s t o r eportvi ol at i ons of the R ul es of Pr ofes s i onal C onduct

. B as ed on thatduty , the courtfound that a l aw y erhad s t andi ng t o pr es enta mot i on t o di s qual i fyi t s oppos i ng c o u n s e l. R ul e 8. 3 of the N ew J er s ey R ul es of P r ofes s i onal C o n d u c t is th e c u rre n t v e rsio n o f th e ru le a d d re ss e d in S c h if f li; it pr ovi des thata l aw y erw ho know s thatanotherl aw y erhas comm i t t ed a vi ol at i on o f the R ul es of Pr ofes s i onal C onductthat r a i s e s a “ s u b s t a n t i a l q u e s t i o n a s t o th a tl a w ye r ’ s h o n e s ty, tru stw o rth ines s, o r fitn ess a s a law y er in o ther res p ec ts sh all inf o rm the appr opri ate pr ofes s i onal author i ty . ” See a l s o O ’ C onnorv. Jo n es, 94 6 F

. 2 d 1 3 9 5 , 1 3 9 9 (8 C ir

. 1 9 9 1 ) (“In c a s e s w h ere th18 couns el i s i n vi ol at i on of pr ofes s i onal ethi cs , the court m ay acton m o tio n o f

a n a g g rie v e d p a rtyo r m a ya c t su a sp o n te to d isqu ali fy

. ”); I nt ernat i onal E l ectr oni cs C orp. v. Fl anze r , 527 F. 2d 1288, 1295 ( 2d C ir

. 1 9 7 5 ) (co n side ri n g the issu e o f a tt o rne yco n fli ct de sp it e f ail u re o f p a rt ie s to ra is e th e p o in t)

.

W e nee d notdeci de w hetherthe i ns ur er s ’ couns el had a dutyt o di s cl os e G i l bert ’ s conduct i n thi s cas e. I ti s enough thatthe i ns ur er s ’ couns el had the r i ghtt o r ai s e the i s s ue underthe R ules o f Pr ofes s i onal C onductand r equi r e adj udi cat i on bythe co u rt

. C o n clud ing o therw ise w o u ld su g g est that w e d o n o t sup p o rt th e lo n g -sta n d in g r o le o f law y e rs p ra c ticin g b e f

o re f e d e ra l co u rts in m o n ito ri n g a n d re p o rt in g e th ic a l v io la tio n s .

W e n o te a lso , as a p ra c tica l m a tte r, th a t in ci r cumst ance s s uch as thos e pr es enther e, i ti s hi ghl yunl i kel ythat a n yo f th e p a r ties o th e r th a n th e in su re rs o r th e ir a tto rn e y s w o u ld c h a l l e n g e th e a p p l i c a t i o n f o rr e t e n t i o n o f

Gi l b e r t

. Co n g o l e u m, G ilb e rt, P e rry W e itz a n d Jo se p h R ice w o rk e d to g e th e r to n e g o tiate the t erm s of the pr e- packa ged pl an and al l w er e dee pl ycomm i t t ed in h av ing itap p rov ed

. M o reo v er, w e a re a w are that th e stan d ard set o u t i n T rav elers is a jurispru d en ti al an d n o t a str ictstatu tory r eq u i r e me n t f

o r s t a n d i n g . W e a r e p e r s u a d e d th a t , i n t he ci r cumst ance s her e, the i ns ur er s and thei ratt orney s have s t andi ng to p re s e n t th is a p p e a l. V.

H avi ng concl uded thats t a n d i n g h a s b e e n e s t ab l i s hed, w e turn t o the R ul es of Pr ofes s i onal C onduct and the s t andar ds s et b yth e B a n k ru p tc yC o d e . A.

T he D i s tr i ctC our t ’ s l ocal rul es pr ovi de thatthe rul es of A m er i can B ar A s s oci at i on, as r evi s ed bythe N ew J er s ey S u p rem e C o u rt , ap p lyto atto rn ey s p rac ti cing b ef o re the co u rt “s ubj ectt o s uch modi fi cat i ons as m ay be r equi r ed orperm i t t ed by fede r al s t atut e, r egul at ion , co ur trul e ordeci s i on of l aw . ” Local R u le 10 3

. 1 (D

. N .J

. ). In th e a b sen ce o f a “d ef init ive s tat e c o u rt d e c i s i o n i n t e rp r e t i n g th e ru l e s a s p r o m u l g a t e d b y th e [ N e w J e r s e y] S u p r e me Co u r t , th e f

e d e r a l c o u r twi l l p r o c e e d t o r e a c h i t s o wn conc lusi ons as t o the appr opr i at e appl i cat i on of the rul es ofR ul e 1. 7 of the N ew J er s eyR ul es of Pr ofes s i onal 12 Co n d u c twa s r e v i s e d i n No v e mb e r 2 0 0 3 a n d th e n e w ru l e b e c a me 19 pr ofes s i onal conduct

. U ni t ed S t at es v. B al t er , 91 F. 3d 427, 435 ( 3d C ir . 1 9 9 6 ) ( q u o tin g N e w J e rs e yD is tr ic t C o u rt L o c a l R u le s ).

I n I nt ernat i o n al B us i nes s M achi nes C orp. v. L evi n, 579 F. 2d 271, 279 n. 2 ( 3d C i r . 1978) , w e not ed that the “conduc t of pr act i t i oner s befor e the feder al court s m us t be gover ned bythe ru le s o f th o s e c o u rt s ra th e r t h a n th o s e o f th e s ta te c o u rt s .” H o w ev er, i n U n it ed S tat es v. M il ler, 6 2 4 F

. 2 d 1 1 9 8 (3d C ir

. 1 9 8 0 ), w e appr oved t h e d i s tr i ctcourt ’ s r el i ance on an opi ni on of the Supr eme C our tof N ew J er s eyi n appl y i ng the l ocal rul es on pr ofes s i onal conduct

. W e observed t hat i ncorpor at i on of s t at e l aw i n thi s fi el d s erves t o avoi d “detr i m en t to the publ i c’ s confi dence i n th e i n t e g r i tyo f

th e b a rth a tmi g h tr e s u l t f r o m c o u r t s i n th e s a me s ta te e n f o rc in g d if

f e re n t e th ic a l n o rm s .” Id . a t 1 2 0 0

. S tate p re c e d e n ts as to p ro f e ss io n a l r e sp o n sib ili ty s houl d be cons ul t ed w hen they ar e compat i bl e w i th fede r al l aw and pol i cy and do not“bal kani ze f eder al l aw . ” G r i evanc e C om m . for S o u thern D istri ct o f N ew Y o rk v . S im els, 4 8 F

. 3 d 6 4 0 , 6 4 5 (2d C ir

. 1995) ; s ee a l s o R es ol ut i on T rus tC orp. v. B r i ght , 6 F. 3d 336, 341 ( 5 C i r . 1993)

. B ankrupt cy pr ofes s i onal s ar e re qui r ed t o exami ne th th e ir re latio n sh ip n o t o n lyb a se d o n th e tw o -p a rtylit ig a tio n m o d e l, butal s o one gui ded by“a s tr i ct er , fi duci arys t andar d. ” 1 C ol l i eron B a n k ru p tc y(1 5 e d .) ¶ 8 .0 1 [ 1 ]. th R ule 1. 7 of the N ew J er s eyR ul es of Pr ofes s i onal C onduct , l i ke R ul e 1. 7 of the A B A ’ s M odel R ul es of Pr ofes s i onal C o n d u ct, p rov ides that, a l aw y er sh all n o t r ep rese n t a cli en t i f th ere is a “ c o n c u rre n t co n f

lict o f in ter e st,” a situ a tio n w h e re e ith e r: (1) the represent at i on of o ne cli ent w i l l be d i rect ly ad v erse to an o ther c li en t; o r ( 2) ther e i s a s i gni fi cantr i s k that the r epr es ent at i on of one orm or e cl i ent s w i l l be materi al l yl i m i t ed by th e la w ye r 's re s p o n s ib iliti e s to a n o th e r c lie n t, a form ercl i ent , ora th ir d p er s on orbya per s onal interest of

the law y er. N J R PC 1. 7( a)

. N otw i ths t andi ng the exi s t ence of a c oncurr ent 12e f f e c tiv e o n Ja n u a ry 1 , 2 0 0 4 . T h e p re v io u s v e rsio n o f R u le 1 .7 d id not addr es s s i tuat i ons w her e a l aw y er ’ s r es pons i bi l i t i es to f o rm er cl i ent s i m pai r ed the curr entr epr es ent at i on and i tdid n o t use the “sig n ifi ca n t ri sk lang u ag e” ; instead itm en ti o n ed situ ati o n s w h ere th e r e p r e s e n t a t i o n o f

a c l i e n t“ m a y b e m a t e r i a l l y l i m i t e d ” b y a l aw y er ’ s other respons i bi l i t i es . T hes e cha nges do notaff ectour di s pos i t i on o f the ca s e bec aus e G i l bertw oul d have be en ac t i ng u n d e r a c o n c u rr e n t c o n f lic t u n d e r e ith e r v e rs io n o f th e ru le

. 20 confl i ctof i nt er es t , a l aw y erm ayundert ake the r epr es ent at i on i f:

(1 ) e a c h a f

f e c ted c lien t g iv e s in f

o rm e d c o n s e n t, confi r m ed i n w r i t i ng, aft erful l di s cl os ur e and c o n su l t at i on . . . [w ]h e n th e law y e r re p re se n ts m u lti p le cl i ents i n a si ng l e m at t er, the co nsult at i on sh a ll i ncl ude an e x p l a n a t i o n o f the comm on r epr es ent at i on and the adva nt ages and r i s ks i nvol ved; ( 2) the l aw y err eas onabl ybel i eves thatthe l aw y er w i l l be abl e t o pr ovi de compet entand di l i gent re p re se n tatio n to e a c h a f f e c ted c lien t; ( 3) the r epr es ent at i on i s notpr ohi bi t ed byl aw ; and ( 4) the r epr es ent at i on does noti nvol ve the as s ert i on of a c l ai m b y o ne cl i entagai ns tanothercl i ent r epr es ent ed bythe l aw y eri n the s ame l it igat i on or o th e r p ro c e e d in g b e f

o re a trib u n a l. N J R P C 1 .7 (b ).

C o m m e n ts to th e A B A v e rsio n o f th is ru le e x p lain the pol i ci es under l y i ng a rul e aga i ns tconcurr entcon fli cts of in ter e st. A b se n t co n se n t, a la w y e r m a yn o t a c t a s a n a d v o c a te in one mat t eragai ns ta per s on the l aw y err epr es ent s in s om e other m att er, be ca u se a co n fli ct th at m a teri all yli m it s a law y er’s r epr es ent at i on of h e rc l i e n t , even a bs entdi r ectadver s i tym ayhi nder a law ye r’s a b ili tyto “ re c o m m e n d o r a d v o c a te a ll p o ss ib le pos i t i ons ” forhercl i ent s . A nnot at ed M odel R ul es of Pr ofes s i onal C o n d u c t 1 0 9 (5 e d .). th As th e Ne w J e r s e yru l e s p e c i f i e s , t h e l a wy e r ’ s o wn i nt er es t s s houl d notbe perm i t t ed t o have a n adverse ef fec ton, or otherw i s e mat er i al l y l i m i t , the re pr es ent at i on of a cl i ent

. A l aw y erS ect i on 32 7(a) st at es: 13 “ Exceptas otherw i s e pr ovi ded i n thi s s ect i on, the t rus t ee, w i th the cou rt ' s app roval , m ayem ployon e or m ore at t orney s, accou ntant s, appr ai s er s , auct i oneer s , orotherpr ofes s i onal perso n s, thatdo not h o ld o r rep rese n t an in terest ad v erse to the e stat e, an d that are di s i nt er es t ed per s ons , t o r epr es entoras s i s tthe trus t ee i n carry i ng o u t th e tru s te e ' s d u tie s u n d e r t h is title .”
1 1 U .S .C .A . § 3 2 7 (a ). S e c tio n 3 2 7 (e ) a d d re ss e s p ro f e ss io n a ls e m p lo y e d f

o r a “ sp e c if

ied sp e c ial p u rp o se ” a n d p ro v id e s th a t

“ T h e tru s t e e , w i th th e c o u r t 's a p p r o v a l , m a y e m p l o y, fora s peci fi ed s peci al purpos e, other than t o r epr es entthe trus t ee in co n d u cti n g the c ase , an att o rne ythat h as re p rese n ted th e d eb tor, i f i n the bes ti nt er es tof the est ate, a n d if s uch att orneydoes not re p re se n t o r h o ld a n yin ter e st ad v e rse to th e d e b to r o r to th e e sta te w i th r es pectt o the mat t er o n w hi ch s uch att orneyi s t o be e m p lo y e d .”
1 1 U .S .C .A . § 3 2 7 (e ).

S e c tio n 3 2 7 a p p lies to a d e b to r in p o ss e ss io n a s w e ll as a trus t ee. U ni t ed St at es T rus t ee v. Pr i ce W at erh ous e, 19 F. 3d 1 3 8 (3 d C ir . 1 9 9 4 ). 21 cannotal l ow a r el at ed bus i nes s i nt er es tt o aff ect hi s r epr es ent at i on, forexampl e, byr ef

err i ng cl i ent s t o an ent erpr i s e i n w hi ch the la w y e r h a s a n id e n tif

ie d f in a n c ia l in te re s t. S e e id

. I n addi t i on t o the s t andar ds es tabl i s hed by pr ofes s i onal ethi cs , att orney s r et ai ned i n bankrupt cyproceedi ngs ar e al s o r equi r ed t o m eetthe r es tr i ct i ons i m pos ed bys ect i on 327 of the B ankrupt cyC ode. Subsecti o n ( a) r es tr i ct s r et ent i on of 13 l aw y er s and otherpr ofes s i onal s t o thos e w ho do nothol d or r epr es entan i nt er es tadver s e t o the es t at e and a r e di s i nt er es t ed. Subse ct i on ( e) perm i t s empl oym ent of an att orney “for a s peci fi ed s peci al purpos e, ” s o l ong as the att orney does not hol d orr epr es ent

“ a n yin ter e st a d v e rse to th e d e b to r o r to th e e sta te w ith re sp e c t to the mat t er ” on w hi ch he i s t o be empl oy ed. T he “spe ci al purpos e”I t a p p e a rs th a t G ilb e rt a c ted a s c o -c o u n se l w ith 14 W ei t z forthes e tw o i ndi vi dual s i n thei rcl ai m s agai ns tanother b a n k ru p t a s b e s to s c o m p a n y .

W e not e a s tr i ki ng di s par i tybetw een the combi ned 15 s ett lem entof $16 m i l l i on, w hi ch i ncl uded ful l ys ecur ed a ss ig n m e n ts o f

in su ra n c e p ro c e e d s M e ss rs. C o o k a n d A rse n e a u lt r ece i ved , and t he part i al l yuns ecur ed $100, 000 s ett l ementthat others w i th m es othel i om a cl ai m s w oul d r ece i ve underthe s ett l ementagr eement ’ s di s eas e mat r i x. 22 m u st be u n re late d to th e re o rg a n iza tio n a n d m u s t b e e x p licitly d esc ri b ed in the ap p li ca ti o n . 3 C o ll ier on B an k rup tcy(15 ed

. ) ¶ th 3 2 7 .0 4 [ 9 ][ d ]. T o p u t th e m att er in f o c u s w e w il l r ev iew G il b ert’s act i vi t i es i n chr onol ogi cal or der

. I n Sept ember2002, w hen i thad exi s t i ng co- couns el agreem ent s w i th W ei t z i n s ever al as bes t os m att er s , G i l bertr epr es ent ed C ongol eum i n s ett l ementnegot i at i ons w i th W ei t z t o r es ol ve the cl ai m s of tw o of i t s ow n cl i ent s , C ook 14 a n d A rse n a u lt, w h o se m e so th e li o m a c laim s w e re th e n in trial. C on go l eum set t l ed the cases for cas h, plus a secured cl ai m against fun ds t hat C on go l eum ho ped t o r ecov er from i t s excess i nsurer s. 15 I n No v e mb e r2 0 0 2 , Gi l b e r tb e c a me c o - c o u n s e l wi th We i t z i n two o th e r a s b e s to s b a n k ru p tc yc a s e s .

I n Fe b ru a ry2 0 0 3 , Con g o l e u m r e t a i ned G i l bertforthe purpos e of ne got i at i ng the pr e- packa ged chapt er11 r eor gani zat i on. T h e r e ta in e r c a lled f

o r n e g o tiatio n s w ith “ k e ya sb e sto s b o d ily i nj urycl aim an ts’ couns el ” as w el l as arr i vi ng atthe “t erm s of a

‘ pr e - p a c k a g e d ’ p l a n o f r e o r g a n i z a t i o n . . . r e v i e wi n g and comm ent i n g o n t he pl an of r eor gani zat i on . . . [and] as s i s t i ng or cons ul t i ng w i th C ongol eum and i t s bankrupt cycouns el on a s tr at egyforconfi r m at i on of the pr e- packa ged pl an. ”

F o r m o s tof 2003, G i l bert , W ei t z and Ri ce w or ked on the t erm s of an a gr eemen t to se t t l e C ongol eum’s curr ent as bes t os r el at ed i nj urycl ai m s . T he s ett l ementagr eementthey ul t i ma t e l yd r a f

t e d p r o v i d e d f

o rs c r e e n i n g o f

e a c h p a r t i c i p a t i ng cl ai m antbyK enes i s , a pr oces s tha tw as i n eff ectdur i ng the pr epet i t i on per i od. A t the s ame t i m e, G i l bertw as as s i s t i ng the D ughi f ir m in th e c o v e ra g e litig a tio n in th e N e w J e rs e ys ta te c o u rt

.I n a depos i t i on i n the N ew J er s eycover age a ct i on, 16 S c o tt G ilb e rt, a p a rtn e r i n G ilb e rt, w a s a sk e d if a n yo f th e c laim a n ts he r epr es ent ed as co- couns el w i th W ei t z i n the R obert A

. K eas bey cas e w er e al s o s ui ng C ongol eum. Scot t G i l bert r epl i ed thathe w as uns ur e how m anycl ai m ant s over l apped a nd had neve ratt empt ed t o det erm i ne i f ther e w as an ove r l ap. I n s ubs equentdepos i t i on tes tim o n yh e w o u ld o n ly“ a ss u m e ” th a t G ilb e rt re p re se n ted c lien ts i n otherbankrupt ci es thathad cl ai m s a g a i n s tCongol eum, i ncl udi ng M e s s rs . C o o k e a n d A rs e n a u lt. 23

W ei t z r epr es ent ed m an yi ndi vi dual s w ho pr es ent ed cl ai m s agai ns t C ongol eum and w ho w er e scr eene d by K enes i s and w ho w er e a l s o c l i e n t s o f Gi l b e r ta s c o - c o u n s e l

. Be f o r e the i ns ur er s ’ appea l r eac hed the D i s tr i ctC our t , G i l bertpr oduced i n the N ew J er s eycover age a ct i on a l i s tof cl ai m ant s thati tr epr es ent ed as co- couns el w i th W ei t z. T hi s l i s tcont ai ns the names of appr oxi m at el y 15, 000 i ndi vi dual s ; the i ns ur er s es t i m at ed 10, 000 of tho se in d ividu als h av e c lai m s ag ains t C o n g o leum

. N eith er G il b ert no r C on go l eum hav e den i ed thatthere i s an overl ap o f cl ai m ants

. 16

In a t l ea st th ree o ther a sb es t os claim an t case s, G il b ert a n d W e itz h a d a g re e d to c h a rg e th e in d iv id u a ls th e yjo in tly r epr es e n t e d a 1 0 % c o n t i n g e n c yf e e “ o n a n ya n d a l l i n s u r a nce p ro c e e d s re c o v e re d

. . . [b y th e c laim a n t] in c o n n e c tio n w ith th e ir cl ai m s agai ns t[the asbes t os defe ndant ] and i t s i ns ur er s . ” The in su re rs h e re a ss e rt th a t th a t sa m e f e e a rra n g e m e n t is p re se n t in cas es agai ns tC ongol eum. G i l berthas notdeni ed thatas s ert i on des pi t e demands t hati tdi s close the det ai l s of i t s fee s har i ng arr angement s w i th W ei t z. T hus G i l bertr epr es ent ed C ongol eum and ac t i vel ypart i ci pat ed i n the cl ai m ant s ’ s ett l ementnegot i at i ons w h ile s im u ltan e o u slyre p re se n tin g so m e o f th o se c laim a n ts, a lb e it a s s e rt e d ly o n ly in in s u ra n c e m a tte rs .

I n negot i at i ng the s ett l ementagr eemen t a nd pl an t erm s w i th W ei t z and R ice pr e- pet i t i on, G i l bert , as couns el for C ongol eum, had a dutyt o l i m i tthe company ’ s r es pons i bi l i tyon s uch keyfea tur es as the di s eas e mat r i x, expos ur e t o as bes t os fr om C o n g o l e u m p r o d u c t s , i f a n y, a n d th e e x t e n to f a c tu a l i n

j u ry. A lth o u g h th e se ttl e m e n t ag re e m e n t re q u ire d th e c laim a n ts to re lea se C o n g o leu m , G ilb e rt a d m itt e d in th e c o v e ra g e a c tio n in sta te24 c o u rt th a t th e re lea se w a s a lim ited o n e a n d a p p lied o n lyif pr ocee ds w er e r ecove r ed fr om the i ns ur ance compan ies. I f that att empt fai l ed, then C ongol eum w oul d be l i abl e t o the in d i vi dual cl ai m an t s forthe amountof the s ett l ement s , thus pi t t i ng C ongol eum aga i ns t the i ndi vi dual cl ai m ant s G i l bertr epr es ent s as co- couns el w i th W ei t z.

C o n g ol eum’s i nt er es t s cal l ed fora r educt i on i n the num berof cl ai m s appro v ed thatw oul d l i kel ybe i ncl uded i n a s ett l ementpacka ge pr es ent ed t o the i ns ur er s . T h e insur er s ci t ed m aj ordefi ci enci es i n the val i di tyof s om e cl ai m s ap p r oved by K enesi s . T o the ext entthatthe cl ai m s w er e notval i d, i tw as G i l bert ’ s r es pons i bi l i ty i n r epr es ent i ng C ongol eum t o s ee thatthey w er e r ej ect ed, even though i tw oul d be adve r s e t o G i l bert’ s interests if tho se c lai m s w ere p u rsue d ind ividu all yo r w ere e x c lu d e d f

ro m a “ p a c k a g e ” o f

f e r e d to th e in su re rs in se ttl e m e n t. T h is w a s n o t a p o te n tia l, b u t a n a c tu a l c o n f lic t. T o l egi t i m i ze the al l eged confl i ct s , G i l bertr el i es on w ai ver s both fr om C ongol eum and cl i ent s the fi r m r epr es ent ed as co- couns el w i th W ei t z. H ow ever, G i l bertdi d notcont actthe c la im a n ts ; in s te a d it r e lie d u p o n W e itz to s e c u re th o s e w a iv e rs .

A s di s cus s ed abo v e, i n s ever al ear l i eras bes t os bankrupt cypr ocee dings , W ei t z exe cut ed enga gementl ett er s for G i l bert ’ s w or k as co- couns el

. I n thos e agr eement s , W ei t z w ai ved “al l p r e s e n t a n d f

u tu r e c o n f

l i c t s o f i n t e r e s t o n b e h a l f o f ” t he i nd i vidual cl i ents the fi rm s joi ntl y repr esent ed and agreed to advis e the c li en ts of

the in fo rm ati o n co n tai n ed in the en g ag em en t l ett ers inclu d ing G il b e rt ’s d iscl o su re o f it s rep rese n tat ion o f to rt d e f e n d a n ts. G ilb e rt h a s n o t d isc lo se d a n e n g a g e m e n t lette r w ith W ei t z forcl ai m ant s i n the C ongole um cas e, al though i thas not d e n ie d th a t o n e e x is ts

.

T he r ecor d does notes t abl i s h thatW ei t z h ad t he author i tyt o i s s ue w ai ver s on behal f of t he thous ands of i ndi vi dual cl ai m ant s it rep r es ent ed. I n addi t i on, the r ecor d does noti ncl ude the i nform at i on, i f any , that W ei t z furni s hed t o the i ndi vi dual s nor does i t i ndi cat e w hethertheyw er e gi ven the opportuni tyt o obj ectIn a su b seq u en t pro ce ed ing , the in su rers 17 chal l enged Ri ce & W eit z’ s fai l ur e t o di s cl os e anytype of c ocouns el , cons ul tant orfee s har i ng r el at i ons hi ps as r equi r ed by B ankrupt cy R u le 20019. T he bankrupt cyj udge di r ect ed W ei t z, R i ce a nd ot her s t o compl yand comm ent ed t h at m an yof the cr edi t or s “have nevers een a copy of the di s cl os ur e s t at ementand, f o r a ll th e c o u rt k n o w s, h a v e a b so lu telyn o id e a h o w th e ir c laim w i l l be t r eat ed under the pl an. ” B ar on & B udd, P. C

. v. U ns ecur ed A s bes t os C l ai m ant ’ s C om m i t t ee [ C ongol eum], 321 B

. R

. 147, 20 05 W L 4 3 5 2 0 7 (D . N .J . 2 0 0 5 ). 25 t o G i l bert ’ s r epr es ent at i on. 17

A l though concurr entconfl i ct s m aybe w ai ved by cl i ent s underthe N ew J er s eyand A B A R ul es of Pr ofess i onal C o n d u ct, the e ff

ec t of a w aive r, p arti cu larl ya p rosp ec ti v e w aive r, depends upon w heth er the cl i ent s have gi ven trul yi nform ed cons ent

. G i ven t he compl exi t i es of the bankrupt cypr ocee di ng and th e “ m a n yh a ts” w o rn b yG ilb e r t th r o u g h o u t th e p re - a n d p o stp eti ti o n p ro ce ss, w e c an n o t con clud e tha t th e p u rpo rt ed w aive rs G ilb e rt re c e iv e d f

ro m W e itz “ o n b e h a lf

o f ” th e in d iv id u a l clie n ts cons t i tut ed i nform ed, pr os pect i ve cons ent

. See B aldas arr e v. B ut l er , 625 A

. 2d 458 ( N

. J

. 1993) (c oncl udi ng thati nform ed c o n se n t w a s n o t su f

f icie n t in a c o m p lex c o m m e rc ial re a l es tate tr ans act i on) ; I n r e M att erof Edw ar d J

. D ol an, 384 A

. 2d 1076, 1082 (N

. J. 19 78 ) ( “[T ]hi s C ou rtw i l l no t t oler at e con sent s w hich ar e l ess than know i ng, i nt el l i gentand vol unt ary . ”) ; I n r e Lanza, 322 A

. 2d 44 5 (N

. J. 19 74 ) ( con cl ud i ng th a tat t orneyshou l d h ave f i rs t expl ai ned .

. . al l the fact s and i ndi cat ed i n s peci fi c det ai l al l of the a re a s o f p o te n tia l c o n f

lic t th a t f o re s e e a b ly m ig h t a ri s e .” ). W e conc l ude thatG i l bertdi d notr ece i ve ef fec t i ve w a iv e r s f

ro m th e c laim a n ts it re p re se n ted a n d , the re f o re , ac ted in v io la tio n o f

th e R u le s o f

P ro f e s s io n a l C o n d u c t. B. I n a d d i t i o n t o f

a i l i n g t o r e v i e w t h e wa i v e rp r o b l e m, t he b a n k ru p t c y j u d g e r e l i e d o n a n u n r e a l i s t i c v i e w th a tt he in s u r a n c e in te r e s ts o f

th e c la im a n ts a n d C o n g o le u m w e r e s o c lo s e ly al i gned and s o narr ow l ydefi ned that ther e w as no actual confl i ct of i nt er es t

. T hi s err or w as the r es ul t , t o a gr eat ext ent, o f t heO n M ay13, 2005, the stat e j udge i n the N ew 18 Je rse yc o v e ra g e a c tio n h e a rd o ra l ar g u m e n t o n a m o ti o n to di s qual i fyG i lbert as couns el forC ongol eum i n thatact i on. T he courtconc luded i tw oul d “r el uct ant l ydenythe i ns ur ance c o m p a n ie s ’ m o tio n to d is q u a lif y G H R a s C o n g o le u m ’s a tto rn e y .” T he j udge s t at ed thathe m i ght have r eac hed a di ffe r entr es ul ti f he had recei ved the m oti on t o d i squali fyearl i er i n the proceedings. T he courtal so n o ted, i n s uppor tof i t s deci s i on nott o gr antthe m o tio n to d isq u a lify , th a t th e B a n k ru p tcy a n d D istric t C o u rts in th is p roc ee d ing h ad p rev iou sly d en ied si m il ar m o ti o n s a s to G il b ert’s a lleg e d c o n f

licts o f in ter e st. 26 cou rt ’s refusal t o consi der evidence abou t G i l bert ’s act i vit ies in negot i at i ng and pr epari n g the pl an bef or e i t s fi l i ng. T hos e pr ep eti ti o n ac ti v it ies w ere clea rl ysep ara te fro m see k ing a re co v ery fr om i ns ur ance compani es aft erthe cl ai m s w er e l i qui dat ed orfr om at t em pti ng t o n ego t i at e set t l em ents w i th the i nsurer s. 18

T h e a p p li ca ti o n p rese n ted to the b an k rup tcyco u rt re c ited th a t G il b e rt w o u ld b e “ p rim a rilyre sp o n sib le f o r stra teg ic advi ce on i ns ur ance i s s ues , i ncl udi ng butnot l i m i t ed t o i ns ur ance r el at ed s ett l ementnegot i at i ons and the rep rese nt at i on of the D eb tor s w i th r es pectt o i ns ur ance i s s ues ar i s i ng i n the cont extof the chapt er11 cas es . ” H ow ever , the appl i cati o n al s o s t at ed that G i l bert ’ s r epr es ent at i on had enc om pas s ed the negot i at i ons of the p lan and pr e- pet i t i on s ett l ementof as bes t os cl ai m s . T he appl i cat i on i ndi cat ed thatservi ces t o be pr ovi ded pos t

- pet i t i on in c lu d e d “ a d v isi n g a n d a ss istin g th e d e b to rs w ith re sp e c t to i ns ur ance - r el at ed i s s ues in conne ct i on w i th the form ul at i on, negot i at i on, and conf

i r m at i on of a pl an of r eor gani zat i on. ” A l though the bankrupt cycourtr el i ed on t he narr ow ro le G ilb e rt w a s to h a v e in th e re o rg a n iza tio n p ro c e ss , the ju d g e d id n o t in q u ire a b o u t th e b ro a d sc o p e o f G il b e rt’s a c tiv iti e s in negot i at i ng the pl an and the s ett l ementagr eement

. N ordi d the c o u rt q u e stio n G ilb e rt’s r o le p o st-p e tit io n , as d e sc ri b e d in Co n g o l e u m’ s a p p l i c a t i o n , i n “ a d v i s i n g a n d a s s i s t i n g [ Co n g o l e u m] w i th r es pectt o i nsu r ance - r el at ed i s s ues i n connec t i on w i th the form ul at i on, negot i at i on and co nfi r m at i on of a pl an of r eor gani zat i on. ”27 G ilb e rt , in f

a c t, co n tin u e s to p a rticip a te a c tiv e lyin form ul at i ng and r ev isi n g the pl an. T her e have been c hanges and amendm ent s , atl eas tfourof them, t o the t extof the or i gi nal pl an th u s f a r a n d G ilb e rt h a s b e e n in v o lv e d in th a t p ro c e ss . A f if th ver s i on of the pl an i s s etforcons i der at i on s om e mont hs hence

.

In th e u su a l situ a tio n , w h e n c o u n se l is re tain e d to r ecove ri ns ur ance pr ocee ds , the under l y i ng cl ai m has been r educe d t o a j udgm entors ett l ed fora s peci fi c amount

. T h e retent i on of sp ec ial couns el t o acts ol el yas appel l at e l aw y eri n s uch ci r cumst ance s i s an exa m pl e of the i nt entof sec ti o n 3 27( e)

. B ut her e the cl ai m s have not been l i qui dat ed – the pl an has noty etbeen appr oved and onl y that rul i ng w i l l confi r m the s peci fi c al l ocat i on o f d a m a g e s . U n til th a t o c c u rs, a c tio n a g a in st th e in su re rs is pr ematur e. G i l bert has att empt ed to d raw a sh arp de m ar cat i on b e tw e e n its in su ra n c e a d v ic e a n d o th e r ta sk s it u n d e rto o k . Its e f f o rts, h o w e v e r, m ig h t b e lik e n e d to a ttem p ts a t u sin g a sc a lp e l to c a rv e a b o w l o f

s o u p . G i l bert ’ s reten ti o n is far too ex p an sive an assig n m ent t o be appr op ri ate foran appoi nt m entunder§ 327( e)

. T he appl i cat i on m or e pr oper l y fal l s under the am bi t of § 327( a) w hi ch al l ow s empl oym entof pr ofes s i onal s t o as s i s tgener al l yi n the a d m in istra tio n o f

th e e sta te. T h a t su b se c tio n , h o w e v e r, p ro h ib its appoi n tm ent s of i ndi vi dual s orent i t i es w ho hol d orr epr es entan in te re s t a d v e rs e to th e e s ta te a n d a re n o t “ d is in te re s te d .”

I n M arvel E n t ert ai nm entG r oup, 140 F. 3d 463 ( 3d C ir

. 1 9 9 8 ), w e h eld th at disq u ali fica ti o n co u ld b e im p o sed w h ere a n a c tu a l c o n f

l i c to f i n t e r e s twas p r e s e n to r , wi th i n th e di s cr et i on of the cour t, w h ere a pot ent i al confl i ctof i nt er es texi s t ed. T he p re se n c e o f th e a p p e a ra n c e o f im p ro p rie ty sta n d in g a lo n e is n o t a su ff ici en t gro u n d fo r disq u ali fica ti o n , id. at4 7 7 , b u t the re is m o re than that h ere . S ee also In re: B H N P , 9 4 9 F

. 2 d 1 3 0 0 , 1 3 1 3 (3d C ir

. 1991) ( “[I ] n s om e ci r cumst ance s , the pot ent i al forconfl i ctand the appea r ance of conf

l i ct m ay , w i thout m or e, j us t i fyr emov[al ]

. . . [of a trus t ee]

. ”) ; I n r e: M art i n, 817 F. 2d 175, 180- 81 ( 1 C ir

. 1987) st ( concl udi ng thats ect i on 327 addr es s es the appearan ce of i m pr opr i ety , “i r r es pect i ve of t he i nt egr i ty of per s on orfi r m under cons i der at i on. ”) ; 3 C ol l i eron B ankrupt cy( 15 ed. ) § 327. 04[5] [a] th ( n o t i n g th a tth e a p p e a r a n c e o f i mpr o p r i e tyma y , whe n combi ned w ith a p o te n tia l c o n f

lic t, b e s u f

f ic ie n t f o r d is q u a lif

ic a tio n ).I n B ar on & B udd, P. C

. v. U ns ecur ed A s bes t os 19 C l a i m a n t ’ s C o m m i t t e e [ C o n g o l e u m ] , 3 2 1 B

. R

. 1 4 7 n . 1 7 , 2 0 0 5 WL 43 52 07 (D

. N

. J. 20 05 ), a proceed i ng i n the C on go l eum case s ubs equentt o thi s one, both court s agr eed thatpr e- pet i t i on relati o ns hi ps w er e r el evant

. “The t ot al i tyof the fa ct s befor e the bankrupt cycourts ugges tthe opportuni tyforabus e of f ee s har i ng r el at i ons hi ps , i nvol vi ng att orney s i n connec t i on w i th the pr ep e tit io n p ro c e ss , to th e e n d o f c o n f e rrin g p re f

e r e n tial se c u rity i nt er es t s on appel l ant ’ s cl i ent s . ”

S e e a l s o S . E liz a b e th G ib s o n , F e d . J u d ic ia l C tr ., Ju d ici al M an ag em en t o f M ass T o rt B an k rup tcy C ase s 1 2 2 (20 0 5 ). ( “A j udge pre s ent ed w i th a pr epac kaged mas s t or tpl an nee ds t o be ful l yi nform ed about the ci r cumst ance s s urr oundi ng the pr epet i t i on negot i at i ons i n or dert o d eterm ine w hetherthe pr oces s has been t ai nt ed byconfl i ct s of i nt er es torself-int er es t ed ac t i ons bythe p arti cipa n ts. ”). 28

O ur di s cus s i on of the R ul es of Pr ofes s i onal C onduct d em o n str ates tha t G il b ert also ca n n o t m ee t th e B an k rup tcyC o d e’s re q u ire m e n t o f

d isin ter e stn e ss c o n tain e d in se c tio n 3 2 7 ( a ). Its sta tu s a s c o -c o u n se l w ith W e itz a n d its o w n e rsh ip in ter e st in K enes i s r epr es entfac t or s w hi ch pr ev entG i l bertfr om bei ng c o m p lete lylo y a l to C o n g o leu m ’s in ter e sts . W e n o te a lso in th is r es pectthatw ai ver s under§ 327( a) ar e or di nar i l ynoteff ect i ve. S e e I n r e : Gr a n i t e P a r tn e r s L P , 2 1 9 B. R. 2 2 , 3 4 ( Ba n k r . S

. D. N. Y. 1 9 9 8 ); C o llie r o n B a n k ru p tc y¶ 3 2 8 .0 5 [ 3 ] ( 1 5 e d .). th W e con cl ud e t hat G i l bert ’s em ploym ent i n thi s case w a s c o n tr a ry to s e c tio n 3 2 7 o f th e B a n k ru p tc yC o d e . W e do notappr ove of a bankrupt cycourtappl y i ng l es s than ca r eful s crut i nyt o pr e- pet i t i on pr o cedur es i n pr epack aged plans. T he part i es here seek the co urt ’s i m pri m atur of a reo rga n izati o n that w ill f re e the d eb tor o f a ll cu rren t and fu ture a sb e st o s liab ili ty . T h e leg iti m a c yo f su c h a tra n sa c tio n is d e p e n d e n t o n th e sta tu re o f th e c o u rt. 19 I n a pr e- packa ged s ett i ng, m os tof the w or k on a pl an o f r e o r g a n i z a t i o n th a tw o u l d o c c u ri n a “ tr a d i t i o n a l b a n k ru p t c y” happens befor e the debt orfi l es i t s pet i t i on. For a court t o appr ove29 a p re -p a c k a g e d p lan w h o se p re p a ra tio n w a s ta in ted w ith overr eac hi ng, forexampl e, w oul d be a pe r ver s ion of the ban kruptcyprocess.

Pr e- packa ged pl ans offe r a m eans of expedi t i ng the bankrupt cy pr oces s by doi ng m os t of t he w or k i n advanc e of f i l i ng. T hateff i ci ency , how ever , m us tnotbe obt ai n ed at t he pr i ce of d im in ish in g th e in teg rityo f th e p ro c e ss . In th is c a se , itw a s n o t a p ro p e r e x e r c is e o f

th e b a n k ru p tcy co u rt’s d isc re tio n to f a il t o cons i derand appr ai s e the conduc tof the part i es a nd couns el pr ep e titio n . W e obs erve al s o thatthe bankrupt cycou rt has an obl i gat i on t o pr eventunnece s s a ry e x p e n d i tu r e s i n t he a d m in is tr a tio n o f

a n e s ta te . S e e In re : B u s yB e a v e r B ld g . C tr s ., Inc

. , 1 9 F

. 3 d 8 3 3 (3d C ir

. 1 9 9 4 ) (ho lding that the b an k rup tcyco u rt has authori ty to exam i ne co un sel fees su a sp o n te )

. E ven i f i tbe as s um ed thatG i l bert ’ s r epr es ent at i on of C ongol eum post

- pet i t i on w as excl us i vel y relat ed t o i t s for thcomi ng di s put es w i th the in su re r s , itis n o t cle a r o n th is re c o rd w h yit w a s n e c e ss a ryto appoi ntan addi t i onal fi r m t o handl e i ns ur ance i s s ues . T he D ughi f irm h a d re p re se n ted C o n g o le u m f o r m o re th a n ten y e a rs in insu ran ce m att ers a n d h ad b ee n ac ti v ely en g ag ed in the stat e c o u rt cover age a ct i on s i nce 2001. T he r ecor d fai l s t o r evea l w hats peci al c o m p e ten c e in th e in su ra n c e f ield G ilb e rt w o u ld p ro v id e in a d d itio n to th a t o f

th e D u g h i f

ir m . T he fl ood of as bes t os l i t i gat i on has been a s er i ous pr obl em for the court s of thi s country beca us e the l ar ge numberof cl ai m s ar e noteasil y adapt abl e t o tr adi t i onal comm on l aw p roc ed u res. S ee A ch em P rod u cts v

. W ind so r, 5 2 1 U

. S

. 5 9 1 (19 9 7 ); C om bus t i on E ngi neer i ng, 391 F. 3d at 200. C ongr es s has pr ovi ded f o r th e u s e o f a tr u st a n d c h a n n e lin g in ju n c tio n a s a p o ss ib le s ol ut i on, buti tappea r s that the propos al s fori m pl ement at i on of an admi ni s tr at i ve s y s t em som ew hat s i m i l art o thatus ed i n bl ack l ung c la im s a re m o re p ro m is in g .

A s thi s cas e demonstr at es , l eavi ng the pr ocedur es for al l ocat i on of r es our ces pr edomi nant l y in the hands of pr i vat e, conf l i c t i n g i n t e r e s t s h a s l e d t o p r o b l e ms o f f a i ra n d e q u al reso luti o n . T h e n ee d fo r c o u n sel w ith u n d ivide d loy alt ies i s m o re pr es s i ng i n cas es of thi s natur e than i n m or e fa m i l i arconvent i onal l i t i gat i on. C orr es pondi ngl y , the l evel of courts upervi s i on m us tbe30 o f a h ig h o rd e r.

M a n yof the i ssues are si m i l ar t o tho se that ari se in cl as s act i ons forper s onal i nj uri es. In r e: C om m uni tyB ank of N or thern V i r gi ni a, 418 F. 3d 277 ( 3d C i r . 2005) , w e comm ent ed that “i n cl as s act i ons , part i cul ar l ys ett l ement

- onl ys ui t s , the di s tr i ct courthas a duty‘ t o pr ot ectthe mem ber s of the cl as s . . . fr om l aw y er s for the cl as s w ho m ay , i n der ogat i on of thei rpr ofes s i onal and fi duci ary obl i gat i ons , pl ace thei rpecuni arys el f- i nt er es tahea d of t h at o f the cl as s . ’ ” I d. at318 ( quot i ng R eynol ds v. B enef i ci al N at ’ l B ank, 288 F. 3d 277, 279 ( 7 C i r . 2002) )

. W e need make no th fi ndi ng that thi s has occurr ed i n the cas e bef or e us , butw e ca ut i on thather e, as i n s i tuat i ons o f sett l ement

- onl ycl as s l i t i gat i on, “ca r eful and compr ehens i ve s crut i nyi s r equi r ed. ”

W e r ecogni ze that or di nar i l y a re m and t o the D i s tr i ct and B an krupt cycourt s w oul d be i n or derforfur therfi ndi ngs and appr opr i at e act i on. H ow ever , her e the r ecor d cont ai ns s uffi ci ent e v id e n c e th a t w e m a y e x p e d ite th e p ro c e d u re s. T h e re f o re , w e w ill r ever s e the or derappr ovi ng the r et ent i on of the G i l bertfi r m and re m a n d to th e D istric t C o u rt f o r f u rth e r p ro c e e d in g s c o n sis ten t w ith th is O p in io n .