Opinion ID: 835208
Heading Depth: 2
Heading Rank: 1

Heading: Violation of DR 5-101(A)(1) in the Bankruptcy Matter

Text: The Bar seeks review of the trial panel's decision that the accused did not violate DR 5-101(A)(1) in the bankruptcy matter. Pursuant to that rule, a lawyer is prohibited from accepting or continuing employment if the exercise of the lawyer's professional judgment on behalf of the lawyer's client will be or reasonably may be affected by the lawyer's own financial, business, property, or personal interests, unless the client consents after full disclosure. DR 5-101(A)(1). The Bar argues that the accused violated that rule because he accepted employment as special counsel in the Chapter 7 bankruptcy when his personal interest either affected or may have affected his judgment. The Bar contends that the accused's interests were affected because his primary motivation in seeking to challenge the Dorsey lien was to protect his outstanding Chapter 13 fees. To analyze the accused's duties in the Chapter 7 proceeding, it is important to describe the duties of a trustee and the various roles that attorneys employed by trustees may have. When a debtor files a petition in bankruptcy, an estate is created. See 11 U.S.C. § 541(a) (describing creation of bankruptcy estate). In a Chapter 7 liquidation proceeding, a trustee manages the estate for the benefit of the creditors of the estate. The trustee's duties include marshaling assets and liquidating the property of the estate as expeditiously as is compatible with the best interests of the parties in interest. 11 U.S.C. § 704(1). The trustee's primary duty is to manage the assets for the benefit of the unsecured creditors. In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, 375 B.R. 719, 727 (Bankr. S.D.N.Y. 2007); In re Thu Viet Dinh, 80 B.R. 819, 822 (Bankr.S.D.Miss.1987). Secured creditors, by contrast, do not need the trustee's protection nearly as much as the unsecured creditors, because the secured creditors have (or ought to have) adequate protection based on their security interests. Dinh, 80 B.R. at 822. The bankruptcy trustee may hire an attorney for general advice and assistance or to perform a particular task, and different conflict of interest rules apply in each instance. The trustee may hire an attorney to represent or assist the trustee in carrying out the trustee's duties. 11 U.S.C. § 327(a). Such an attorney must not hold or represent an interest adverse to the estate and must be a disinterested person. Id. ; 11 U.S.C. § 101(14) (defining disinterested person as, inter alia, not a creditor). By contrast, with court approval and for a specified special purpose, other than to represent the trustee in conducting the case, the trustee may employ a special counsel. Although an attorney who previously has represented the debtor is likely to have unsatisfied legal fees, see In re Heatron, 5 B.R. 703, 705 (Bankr. W.D.Mo.1980) (so stating), special counsel may be an attorney that has represented the debtor, if [it is] in the best interest of the estate. 11 U.S.C. § 327(e). Rather than having to satisfy the stricter criteria applicable to a disinterested person, special counsel may hold an interest adverse to the estate, but must not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.  Id. (emphasis added). As the trustee, Trunnell, indicated in her testimony, efficiency is a prime consideration in employing the debtor's attorney as special counsel, because the debtor's attorney is familiar with the case, the parties, and the claims. In this case, Trunnell employed the accused as special counsel, and the Bar understandably does not contend that the accused's interest in collecting his fees alone created a conflict of interest sufficient to subject him to the requirements of DR 5-101(A)(1). At the time that the accused sought and accepted that employment, he did not represent or hold an interest adverse to the debtor or to the estate with respect to the adversary proceeding for which he was employed. Trunnell's duty in the adversary proceeding was to manage the estate for the benefit of the unsecured creditors, and the accused's interest and the interest of the trustee were the same: to increase the size of the estate for the benefit of the creditors, including the accused. The Bar argues that, in this case, however, the accused's interests were different from those of other lawyers who have represented debtors and who thereafter represent the bankruptcy estate. Here, the Bar contends, the accused's self-interest was primary and overrode his interest in protecting the estate and the other creditors. For that contention, the Bar relies on a letter that the accused wrote to the United States Trustee after the conflict with Trunnell over the settlement arose. In that letter, the accused wrote that protection of this Chapter 13 administrative expense claim was one of the prime motivating reasons for his undertaking to represent the estate. Trunnell testified in the disciplinary proceeding that, when she first employed the accused, she did not know that he was primarily motivated to protect his fees and that, in the absence of that knowledge, she had relied on the accused's advice and may not have considered the extra costs or chances of prevailing in the adversary proceeding. The Bar asserts that the judgment of a lawyer who is primarily motivated to protect his fees is, or certainly may be, affected by that interest. The accused responds that the Bar misconstrues his memo to the United States Trustee. Although he stated in that memo that one of the primary motivations for his representation of the estate was to protect his fees, he did not state that collecting those fees was his only motivation. The accused also argues that the Bar misconstrues Trunnell's testimony. Specifically, the accused points to Trunnell's testimony that, before the injunction hearing, Trunnell had always seen it as [the accused] putting forth legal efforts to do what was best for the estate, and that's what we both were trying [to] do. We do not find the Bar's evidence that the accused's only motivation in serving as special counsel was to protect his own interests to be clear and convincing. The interests of the accused and Trunnell were aligned until Trunnell decided to enter into a settlement that had the potential to foreclose payment of the accused's fees. In a bankruptcy case, it is not unusual for interests to shift. The multiplicity of parties and interests in bankruptcy proceedings make for a context that is rich in the potential for conflict, but it is also rich in the potential for cooperation. John D. Ayer, How to Think About Bankruptcy Ethics, 60 Am Bankr L J 355, 386 (1986). In bankruptcy, the multiple creditors, each with either a secured or an unsecured interest, each of whom occupies a particular place in the pecking order of priorities, have inherently varying interests, and the trustee may not be able to satisfy all of those interests out of the limited resources of a liquidated estate. See 11 U.S.C. § 507 (listing priority of expenses and claims). When the accused undertook to represent the estate in the adversary proceeding against Dorsey, he and Trunnell thought that that proceeding would defeat the interests of one creditor, Dorsey, but would benefit the others. Alliances shifted when Trunnell determined that Dorsey, rather than the other creditors, should recover its claim. Although that shift created a conflict for the accused, it does not establish that that conflict existed when he initially undertook to file the adversary proceeding. We agree with the trial panel that the accused did not violate DR 5-101(A)(1).