Opinion ID: 6496837
Heading Depth: 2
Heading Rank: 4

Heading: Propriety of Patton’s Appointment

Text: With the FCR appointment standard set, we now turn to the question of whether Patton was properly appointed to the FCR position in the Imerys bankruptcy. It is important to note that, ultimately, neither the Insurers nor the Bankruptcy Court raised any question regarding Patton’s qualifications, independence, undivided loyalty, or ability to be an effective advocate for future claimants apart from the purported ethical conflict arising out of Young Conaway’s work on Warren Pumps. The Insurers nonetheless contend that Young Conaway’s Warren Pumps representation prevents Patton from meeting the FCR appointment standard. Essentially, they make two arguments: first, that Warren Pumps creates a direct conflict of interest between Patton and Continental and 27 National Union themselves, which requires his disqualification; and second, that his Warren Pumps connection taints his independence and ability to be an effective advocate on behalf of the future claimants’ interests. Neither are persuasive.
To the extent Continental and National Union argue that Warren Pumps requires Patton’s disqualification because of the direct conflict of interest it creates between the two companies and Patton, the Bankruptcy Court was correct in ruling that the prospective waiver disposed of this issue. In that waiver provision, those Insurers acknowledged that Young Conaway maintained a “substantial corporate workout, bankruptcy[,] and insolvency practice,” and that they “agree[d] that [Young Conaway] may represent other clients (i) in workout, bankruptcy[,] and insolvency proceedings, and (ii) in connection with trusts established pursuant to section 524(g) of the Bankruptcy Code.” JA 898. They also agreed they “w[ould] not assert that this instant Engagement is a basis for disqualifying [Young Conaway] from representing others” in those bankruptcy-related matters if those Insurers were creditors of the debtor in those bankruptcies and if the interests of Young Conaway’s clients in those matters were “directly adverse” to the Insurers. 15 JA 898–99. The Insurers next argue that it was impossible for them to have given informed consent to the conflict when it arose in the Imerys bankruptcy because Patton’s prepetition work as Proposed FCR was done pursuant to a non-disclosure agreement. Even aside from the fact that the Insurers are sophisticated parties who were represented by both an agent 15 Of course, this was subject to the condition that the future bankruptcy-related matters were not “the same matter or a matter substantially related to the same matter” as the one in which Young Conaway represented the Insurers. JA 898. For the reasons explained below, however, Continental and National Union have not met their burden to establish that this condition of the waiver was not met. See, e.g., Satellite Fin. Planning Corp. v. First Nat’l Bank of Wilmington, 652 F. Supp. 1281, 1283 (D. Del. 1987). 28 and that agent’s insurance counsel, their argument misapprehends what we require of valid prospective waivers. Prospective waivers do not necessitate a second round of consent when a future conflict actually arises; that would defeat the purpose of obtaining a prospective waiver in the first place. Rather, the question is whether at the time of signing the prospective waiver the clients could give “truly informed consent” as to the potential conflicts that foreseeably might arise in the future. Congoleum, 426 F.3d at 691; MODEL RULES OF PRO. CONDUCT, r. 1.7 cmt. 22 (“The effectiveness of such [prospective] waivers is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails.”). And the waiver at issue here was quite clear not only that Young Conaway might be involved in bankruptcy proceedings in which the Insurers would be creditors, but also that the firm was likely to be involved in FCR work specifically. As such, the Bankruptcy Court was justified in concluding that the Warren Pumps insurers would have known at the time of signing that there was a material risk that Young Conaway would be involved in the future in § 524(g) proceedings that would also involve insurance company creditors, a risk that materialized with the Imerys bankruptcy. 16 See, e.g., In re Fisker Auto. Holdings, Inc. S’holder Litig., 2018 WL 3991470, at –4 (D. Del. Aug. 20, 2018) (upholding the 16 Along similar lines, although we concluded supra that § 327 does not govern FCR appointments, we note that even the Insurer’s requested analysis under that section’s per se disqualification provision would have required more information regarding the Warren Pumps litigation. In urging us to apply § 327’s requirements, the Insurers do not identify an actual (or even a potential or apparent) conflict other than the fact of Young Conaway’s involvement in the Warren Pumps litigation. As recently explained, “a conflict is actual [for the purposes of § 327] when the specific facts before the bankruptcy court suggest that ‘it is likely that a professional will be placed in a position permitting it to favor one interest over an impermissibly conflicting interest.’” Boy Scouts, — F.4th —, 2022 WL 1634643, at  (3d Cir. 2022) (quoting In re Pillotex, Inc., 304 F.3d 246, 254 (3d Cir. 2002)). Those facts are lacking here. 29 validity of a prospective waiver based on an analysis of the waiver’s language and the sophistication of the parties).
The Insurers’ only remaining argument is that because the Warren Pumps litigation “involve[d] substantially related issues” as will be raised in the Imerys Bankruptcy, JA 945, it impairs Patton’s ability to serve the future claimants’ interests. Their primary argument on this point is that a future claimant “would probably be displeased” with Patton’s appointment, “[e]specially when . . . this isn’t an unrelated case [to the Warren Pumps litigation]” and “[t]he arguments that [Young Conaway] was making in that case” about policy interpretation issues would be “adverse” to the arguments the FCR can be expected to make about the Insurers’ policies in this bankruptcy. 17 Tran. 64. But in typical conflicts analyses, “substantially related” does not refer to the similarities between the legal issues raised; rather, “[m]atters are ‘substantially related’ . . . if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” MODEL RULES OF PRO. CONDUCT r. 1.9 cmt. 3 (AM. BAR ASS’N 2020); see also RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 132 (2000). Because the Insurers fail to show that Warren Pumps involved the same transactions or legal disputes as might be implicated by Patton’s future work as FCR in the Imerys bankruptcy, we can only say that the matters are “substantially 17 Apart from this argument, the Insurers support their contention of the cases being “substantially related” with only vague assertions that in both cases, “(i) more than one corporate entity asserts a claim to insurance policy proceeds, (ii) insurers have contribution rights among insurers, and (iii) there are issues raised regarding whether excess policies owe defense obligations and to whom under what limitations and conditions,” JA 975-76. 30 related” if there is a “substantial risk” that Patton and Young Conaway will use in the Imerys bankruptcy any confidential information that Young Conaway obtained from its representation of Continental and National Union in Warren Pumps. That is a fact-specific inquiry, see, e.g., Madukwe v. Del. State Univ., 552 F. Supp. 2d 452, 458 (D. Del. 2008), and the Insurers simply do not point to any facts that would establish any risk of weaponized confidential information. In any event, the Bankruptcy Court carefully considered this issue. After it set out an appointment standard quite close in substance to that which we adopt today—one centered on Patton’s ability to serve the future claimants’ interests effectively and impartially—the Court requested additional disclosures concerning the particular matters it thought relevant to its determination of whether Patton met that standard. One of those matters was Patton’s involvement in Young Conaway’s previously disclosed representation of “many if not all of the Certain Excess Insurance companies in insurance coverage litigation related to environmental liabilities, including asbestos liabilities.” JA 32. In response to that request, the Court received and considered not only Patton’s disclosures, but also the unsolicited supplemental objection of the Insurers raising the Warren Pumps conflict, Patton’s response to that objection, and several related declarations and exhibits. And what they revealed only bolstered the Court’s confidence in Patton: that Young Conaway had implemented an ethical wall between its work on Warren Pumps and Patton’s work as FCR in the Imerys bankruptcy, that Patton himself was never involved in the Warren Pumps matter at all, and that Young Conaway had billed only a handful of hours to the matter since 2016 and none since 2018. Given the state of the record on this issue and Patton’s reputation and qualifications for the FCR role, the Bankruptcy Court did not abuse its discretion in concluding that the alleged conflict would not impair Patton’s performance, and that his credentials, experience, and expertise would serve the future claimants’ interests with the required degree of independence and loyalty. 31