By Michael L. Temin and Martha B. Chovanes

Introduction

The relationship for  which counsel for a committee could be disqualified was addressed in the recent case of Bingham Greenbaum Doll, LLP v. Glenview Health Care Facility, Inc., 620 B.R. 582 (6th Cir. B.A.P. 2020) (“Glenview”).  In Glenview, the debtor corporation was owned by two shareholders.  The Official Committee of Unsecured Creditors in the case filed an application to employ an attorney who previously had represented one of the debtor’s 50% shareholders in estate planning matters.   The representation concluded two years before the debtor filed for bankruptcy.  On objection by the Debtor, the bankruptcy court denied the application.  On appeal, the Sixth Circuit BAP vacated the disqualification order.

Employment of Attorney for Creditors Committee

The only restriction placed by the Bankruptcy Code on employment of an attorney for a creditors committee is that “an attorney . . . employed to represent a [creditors] committee . . . may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case  11 U.S.C. § 1103(b).

In denying the employment application for the Committee, the Bankruptcy Court improperly relied, in part,  on § 328(c), which permits a court to deny compensation to a creditors committee attorney “if, at any time during the professional person’s employment under section  . . .1103  .  ., such professional person is not a disinterested person, . . .”

The BAP noted, however, that the Bankruptcy Court’s analysis was conflating § 1103 with § 327 and proceeding as if § 1103 contained the same “disinterested” requirement.

Disinterested As Applied to Attorneys for a Creditors Committee

A professional person is “disinterested” if the person is

  • not a creditor, an equity security holder, or an insider;
  • not and was not within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and
  • does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.

11 U.S.C. § 101(14).

In denying retention of the Committee’s requested counsel, the Bankruptcy Court relied on Section 328(c) which track the language of § 327(a) limiting the professional that a trustee may employ to professionals “that do not hold or represent an interest adverse to the estate, and that are disinterested persons.  By contrast, an attorney for a committee is not required to be “disinterested,” and the prohibition on other employment is limited to concurrent representation of adverse interests in connection with the case.

The inclusion in § 328(c) of the same prohibitions on compensation of debtor counsel and of committee counsel, a requirement of disinterestedness, is inconsistent with the different constituents being represented and the particular roles they play in a bankruptcy case.  Committee counsel is intended to be adverse to the debtor or to other classes of creditors and shareholders (other than those creditors represented by the committee).  Because the application of § 328(c) by a bankruptcy court to deny compensation is discretionary, it is very unlikely that a court would deny compensation to committee counsel for doing its job.

Rules of Professional Conduct

The BAP found that, in assessing whether counsel to the Committee could be retained under § 1103(b), the Bankruptcy Court properly reviewed the Kentucky Rules of Professional Conduct for guidance in exercising its discretion to approve the employment of proposed counsel for the committee after the debtor challenged its qualifications.  The Bankruptcy Court relied on the Sixth Circuit’s articulation of the test for disqualification when counsel’s employment is challenged because of its representation of a former client, which is covered by Rule of Professional Conduct 1.9.

  • a past attorney-client relationship existed between the party seeking disqualification and the attorney it seeks to disqualify,
  • the subject matter of those relationships was/is substantially related; and
  • the attorney acquired confidential information from the party seeking disqualification.

Analyzing the facts, the BAP held there also was no basis on which to disqualify counsel under the state ethics rules.

The Glenview decision should serve as an important reminder for bankruptcy attorneys that in addition to complying with the eligibility criteria for retention under the Bankruptcy Code, attorneys must also be mindful of state ethics rules.