Wednesday, October 5, 2022
Law \ Legal

Risk Roundup — Understanding “Thorny” Bankruptcy Conflicts and Conflict-related Issues, Law Firm Disqualification


Lawyer Can’t Have 2 ‘Masters’: A Judge Just Disqualified This New Jersey Law Firm” —

  • “A judge ruled that Pashman Stein Walder Hayden may not concurrently represent a corporation and a part owner in a dispute with another part owner.”
  • “Judge Albert Rivas ruled after plaintiff counsel cited case law finding that a similar arrangement violated the Rules of Professional Conduct.”
  • “The judge also declined bids to quash a subpoena of the plaintiff’s financial records and to broaden the powers of a special fiscal agent in the case.”
  • “Pashman Stein is free to continue representing the Uppalapati defendants, but may not also represent AM Logic, Rivas said in an order.”
  • “Tallapragada, who allegedly owns 50% of AM Logic, claims in the suit that Madhavi Uppalapati, who isthe alleged owner of the other 50%, has misappropriated $600,000 from the company and won’t let him examine the books. Uppalapati disputes Tallapragada’s ownership claims.”
  • “O’Connor said in court papers that the circumstances are similar to those in a 2014 Appellate Division case, Comando v. Nugiel. In that case, law firm Norris McLaughlin was disqualified from simultaneously representing the defendant and the business that the parties were fighting over.”
  • “O’Connor, who also represented the plaintiff in Comando, said Rivas’ ruling on Friday ‘reaffirms the Comando decision that I cited in the motion papers, which says you cannot claim that a lawyer has two masters. I see lawyers doing it all the time. Even though the court was pretty clear, I still see it coming up all the time. Trial courts are not quick to disqualify lawyers,’ he said.”

Ira L. Herman, Partner, Bankruptcy & Restructuring at Blank Rome wrote an excellent, in depth piece: “Why Bankruptcy Counsel Must Be Mindful of Ethics” —

  • “Counsel and other professionals being engaged to represent a debtor in a restructuring will often face myriad thorny conflicts and conflict-related issues. In the larger cases this is so, at least in part, because of complicated capital structures and interlocking interests.”
  • “Somewhat ironically, the conflict issues in the smaller cases often are more difficult because of the very nature of small and closely held businesses and the dollar amounts at stake in such cases.”
  • “For example, where a potential debtor is a single-member limited liability company, that single member may have guaranteed the debt of the small business, be its landlord, or have made a secured loan to the business. Additionally, small business ownership creates challenges for counsel when such entity’s interests diverge from those of its owner, who may assume that she or he is the business.”
  • “To further illustrate how these issues arise similarly in the larger and smaller cases, retainers and fees regularly are paid on behalf of a debtor by an equity sponsor or an affiliate. In the smaller business cases, friends and family — who may have previously loaned money either to the debtor or its ownership — often pay the freight.”
  • “In matters large and small, Rule 1.8(f) of the American Bar Association’s Model Rules of Professional Conduct must be consulted. A lawyer shall not accept compensation for representing a client from one other than the client unless:
    • The client gives informed consent;
    • There is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and
    • Information relating to representation of a client is protected as required by Rule 1.6.”
  • “The Bankruptcy Code does not define “adverse” interest in any way. In contrast, the term “disinterested person” is defined in Section 101(14). The term “disinterested person” means a person who:
    • Is not a creditor, an equity security holder, or an insider;
    • Is not and was not, within two 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, for any other reason.
  • “When insiders, affiliates, friends and family show up all over a restructuring, it is a time for counsel to be mindful of the professional responsibilities as a lawyer practicing in an area of law that also has unique rules governing professional conduct.”
  • “Counsel’s inquiry cannot start with an analysis of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure.[4][5] Rather, the inquiry must start with the ethical rules found in the Model Code of Professional Conduct, including the duties of loyalty and independent judgment and to whom these duties are owed.”



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