Ethical duties of lawyer to former client when appointed Special Counsel in former client’s Chapter 13 Bankruptcy proceeding.

Facts

A lawyer was retained by a client in an uninsured motorist claim arising from a motor vehicle collision. The lawyer learned that the client was a debtor in a Chapter 13 bankruptcy proceeding. With client consent, the lawyer contacted the bankruptcy trustee and the client’s bankruptcy lawyer to notify them of the uninsured motorist claim as part of the debtor’s duty to disclose all assets. The lawyer was then appointed as special counsel to the bankruptcy estate to pursue the uninsured motorist claim. The lawyer then notified the client of the appointment and the client refused to cooperate with the efforts to prosecute the claim on behalf of the bankruptcy estate and fired the lawyer.

Questions

1. Must the lawyer withdraw as special counsel now that the client has terminated the lawyer?
2. Are the client’s interests in the proceeds of any potential recovery in the uninsured motorist claim materially adverse to the bankruptcy estate under Rule 1.9?
3. What is the lawyer’s duty of confidentiality to the former client regarding information the lawyer learned during the prior representation of the client as special counsel to the bankruptcy proceeding under Rule 1.6(b)(6)?

Opinion

Proceedings under the Bankruptcy Code are governed by the Code and caselaw specific to bankruptcy proceedings. The analysis of ethical considerations in this area must account for the unique nature of bankruptcy proceedings and practice as well as the rules specific to bankruptcy proceedings that do not apply to other legal matters and rules of professional conduct. The answers to the specific questions posed in this inquiry requires an examination of the relationships of the client to the bankruptcy matter as well as the relationship of the lawyer to both the client and the bankruptcy estate.

The Uninsured Motorist Claim is the Property of the Estate

Under 11 U.S.C. § 541(a), the client’s interest in the uninsured motorist claim is the property of the estate. Any cause of action accruing to the Debtor as of the filing of the petition is the property of the estate and may only be prosecuted on behalf of the estate. Miller v. Shallowford Community Hospital, Inc., 767 F.2d 1556 (11th Cir. 1985); In re Bell & Beckwith, 64 B.R. 144,146 (Bankr. N.D. Ohio 1986). Personal injury cases are property of the estate under Section 541(a). In re Cottrell, 876 F.2d 540, 542-43. (6th Cir. 1988). This would be true regardless of whether the client terminated the lawyer. The claim was reported to the trustee and the bankruptcy court approved the employment of the lawyer as special counsel in the case. The client no longer had the legal interest in the claim under the Bankruptcy Code. The client in this case fired the inquiring lawyer as she did not want the bankruptcy estate to recover the money from the claim. However, regardless of whether the lawyer was fired by the debtor, or continued representing the debtor, the claim is no longer the property of the debtor and the lawyer is only representing the trustee in pursuing the uninsured motorist claim on behalf of the bankruptcy estate. This does not mean that the client no longer has a duty to participate in the claim. As the debtor in the Chapter 13 bankruptcy proceeding, the client has a duty to cooperate with trustee. Under 11 U.S.C. §1307(c)(1), any unreasonable delay by the debtor that is prejudicial to creditors may result in the conversion of the Chapter 13 bankruptcy to a Chapter 7 bankruptcy or to a dismissal of the bankruptcy case.

The Lawyer is not Required to Withdraw

The lawyer was employed as special counsel under 11 U.S.C. § 327(e) which provides that the “trustee, with the court’s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does 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.”

The term “adverse interest” is not defined under the Bankruptcy Code and is determined on a case-by-case basis. In re Enron Corp., 2002 Bankr. LEXIS 1720, In re MF Global Inc., 464 B.R. 594,600 (Bankr. S.D.N.Y. 2011). One court stated that “if it is plausible that the representation of another’s interest may cause the debtor’s attorneys to act any differently than they would without the other representation, then they have a conflict of interest and an interest adverse to the estate. To the extent that a personal injury claim is the property of the estate, the trustee could seek court approval for the employment of special counsel. In re Barber, 223 B.R. 830, 831 (Bankr. N.D. Ga. 1998).

Section 327(c) provides that disqualification of a professional employed by the trustee is not automatic unless there is an “actual conflict of interest.” In re Leslie Fay Companies, 175 B.R. 525, 532 (Bankr. S.D.N.Y. 1994). There are two facts which demonstrate that the employment of the inquiring lawyer was permissible under these standards: 1) the bankruptcy court approved employment; and 2) the lawyer was attempting to obtain a recovery on behalf of the estate that would benefit both the estate and the debtor. The lawyer’s duty is to maximize recovery and the interests are not adverse. Where the goal is to maximize the recovery on behalf of the differing parties, no conflict arises. Nisselson v. Wong, et. al. (In re Best Craft General Contractor and Design Cabinet, Inc.), 239 B.R. 462 (Bankr. E.D.N.Y. 1999). In re AGE Ref., Inc., 447 B.R. 786, 803 (Bankr. W.D. Tex. 2011); In re Dev. Corp, of Plymouth, 283 B.R. 464, 468 (E.D. Mich. 2002).

Where the interest of the special counsel (and its client) and the interest of the estate are identical with respect to the matter for which the special counsel is retained, there is no conflict of interest. Bank Brussels Lambert v. Coan (In re AroChem Corp. 176.F.3d 610, 622 (2nd Cir. 1999). Daly v. Kopnover Constr. Corp. (In re Homesteads Cmty. At Newtown, LLC), 390 B.R. 32, 50 (Bankr. Conn. 2008). In this case, the lawyer is no longer representing the debtor as she terminated the representation, relieving the lawyer of taking any action directly on her behalf. Even if the debtor continued the lawyer’s employment, the conclusion remains the same. The interest of the special counsel, as lawyer for the client in the underlying claim, does not create a disqualifying interest, as that interest must be “personal.” Id. at 629. See also 11 U.S.C. § 101(14). That is, the lawyer must hold the same or similar claim as that of the debtor. In re AGE Ref., Inc. supra, at 804. While the inquirer does not state whether the lawyer’s fee was hourly or contingent, assuming it was contingent, as is the customary practice in personal injury litigation, that does not create a conflict of interest. Without more, contingency fee agreements do not create conflicts of interest. Fann Contracting, Inc. v. Garman Turner Gordon LLP, 593 B.R. 625 (Bankr. D. Nev. 2018). See also 11 U.S.C. § 330 which requires the bankruptcy court to approve the reasonableness of fees incurred by special counsel. This conclusion will not change if the lawyer’s fees were on an hourly basis, since the bankruptcy court must approve any fee. As the cases demonstrate, because the debtor’s claim is not deemed “adverse” to the interests of the estate, the lawyer’s continued representation of the bankruptcy estate would not violate Ill. R. Prof’l Conduct 1.9(a) which prohibits a lawyer, who has “formerly represented a client in the matter from representing another person in the same or substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent.” As the foregoing cases state, the interests are not adverse and lawyer would not likely be violating Rule 1.9(a) or (b).

As one court noted, “there is an overwhelming body of [bankruptcy] caselaw in which courts deny disqualification motions in the face of what appear to be obvious conflicts.” Century Indem. Co. v. BSA (In re BSA), 630 B.R. 122, 135 (Bankr. Del. 2021). The benefit of retaining previous counsel outweighs any potential prejudice as the previous counsel is already familiar with the case and would require the estate to compensate new counsel for work already completed. The bankruptcy courts have been allowed to exercise discretion in this area. Id.

Client Confidences

While Ill. R. Prof’l Conduct 1.6(a) would normally prohibit the lawyer from revealing information relating to the representation of the debtor, without informed consent, the unique nature of the proceedings leads to a different conclusion. In In re Klein, 2013 Bankr. LEXIS 5096 (C.D. Cal. 2013), a debtor moved to disqualify the trustee’s lawyer alleging that the debtor had met with the trustee’s lawyer about retaining the lawyer prior to the bankruptcy and that he had shared confidences with the lawyer. The court denied the motion based on the premise that the debtor was required to disclose everything about his business as part of the bankruptcy filing. As a result, there was nothing confidential left to disclose. Similarly, the debtor here is required to disclose information to the special counsel in order to prosecute the claim on behalf of the bankruptcy estate. The lawyer, as special counsel, would be able to utilize the confidential information received from the debtor in the uninsured motorist claim, including any information that is related to the bankruptcy estate beyond the scope of the lawyer’s representation in the uninsured motorist claim. However, it should be noted that if the lawyer obtained confidential information from the debtor in the previous representation, which is unrelated to the uninsured motorist claim, the lawyer would not be authorized to disclose that information. See Ill. R. Prof’l Conduct 1.9(c).

Conclusion

There is no conflict of interest requiring the lawyer to withdraw as special counsel in this matter. The Bankruptcy Code and applicable case law permit the lawyer, as the former lawyer for the debtor, to be employed as special counsel to prosecute the uninsured motorist claim on behalf of the bankruptcy estate. The debtor no longer has a direct interest in the proceeds of the uninsured motorist claim as the claim became the property of the bankruptcy estate. Because the lawyer acting as special counsel to the bankruptcy estate is seeking to maximize recovery for the estate, in the same manner as when representing the client, there is no conflict under Ill. R. Prof’l Conduct 1.9(a). Lastly, under the narrow facts presented here, the special counsel would be authorized to use any confidential information received from the debtor in furtherance of the claim.

References

• 11 U.S.C. § 541(a)
• Miller v. Shallowford Community Hospital, Inc., 767 F.2d 1556 (11th Cir. 1985)
• In re Bell & Beckwith, 64 B.R. 144,146 (Bankr. N.D. Ohio 1986).
• In re Cottrell, 876 F.2d 540, 542-43. (6th Cir. 1988).
• 11 U.S.C. §1307(c)(1)
• 11 U.S.C. § 327(e)
• In re Enron Corp., 2002 Bankr. LEXIS 1720
• In re MF Global Inc., 464 B.R. 594,600 (Bankr. S.D.N.Y. 2011).
• In re Barber, 223 B.R. 830, 831 (Bankr. N.D. Ga. 1998).
• In re Leslie Fay Companies, 175 B.R. 525, 532 (Bankr. S.D.N.Y. 1994).
• Nisselson v. Wong, et. al. (In re Best Craft General Contractor and Design Cabinet, Inc.), 239 B.R. 462 (Bankr. E.D.N.Y. 1999).
• In re AGE Ref., Inc., 447 B.R. 786, 803 (Bankr. W.D. TX 2011)
• In re Dev. Corp, of Plymouth, 283 B.R. 464, 468 (Bankr. E.D. Mich. 2002).
• Bank Brussels Lambert v. Coan (In re AroChem Corp. 176.F.3d 610, 622 (2nd Cir. 1999)
• Daly v. Kopnover Constr. Corp. (In re Homesteads Cmty. At Newtown, LLC), 390 B.R. 32, 50 (Bankr. D. Conn. 2008)
• 11 U.S.C. § 101(14)
• Fann Contracting, Inc. v. Garman Turner Gordon LLP, 593 B.R. 625 (Bankr. D. Nev. 2018).
• 11 U.S.C. § 330
• Ill. R. Prof’l Conduct 1.9(a)(b)(c)
• Century Indem. Co. v. BSA (In re BSA), 630 B.R. 122, 135 (Bankr. Del. 2021)
• Ill. R. Prof’l Conduct 1.6(a)
• In re Klein, 2013 Bankr. 2013 Bankr. LEXIS 5096 (Bankr. C.D. Cal. Dec. 4, 2013)