NEW YORK COUNTY LAWYERS ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 710
The inquiring law firm (“LF”) has been asked to represent a chapter 7 bankruptcy trustee as special counsel in an action against a secured creditor of the debtor for violating the automatic stay and to avoid a prepetition transfer of the debtor’s assets to the secured creditor. LF presently represents two other secured creditors of the debtor and one unsecured creditor in connection with their claims against the estate. LF also represents these two secured creditors in a state court action that was commenced prepetition against the debtor’s principals, based on their guarantee of the debtor’s obligations.
LF inquires whether it ethically may represent the trustee in a bankruptcy court proceeding against the secured creditor who is not LF’s client in light of its concurrent representation of other creditors of the debtor.
At the outset, the Committee notes that in addition to the Lawyer’s Code of Professional Responsibility (the “Code”), the Bankruptcy Code (11 U.S.C. §§ 101 et seq.) contains rules governing the employment of a law firm to represent a trustee in a bankruptcy case. See 11 U.S.C. §§ 327-28; 101(14) (E). Because questions of law are beyond the scope of the Committee’s jurisdiction, we express no view on the application of these statutory provisions (or others) to the proposed representation. Obviously, if the Bankruptcy Code or other applicable law does not permit the proposed representation, ethical considerations are irrelevant.
The inquiry is guided by DR 5-105 of the Code, which requires that a lawyer “decline proffered employment if the exercise of independent professional judgment on behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests.” DR 5-105(A). The Code defines “differing interests” as including “every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse or other interest.” Definitions; see also EC 5-1.
In situations covered by DR 5-105(A), a lawyer may nevertheless accept the proffered employment “if it is obvious that the lawyer can adequately represent the interests [of the clients with differing interests] and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each.” DR 5-105(C). Any doubts regarding the propriety of the multiple representation must be resolved against it. EC 5-15.
The concurrent representation of a trustee in a bankruptcy case and of a creditor with a claim against the bankruptcy estate would involve the representation of parties with “differing interests.” Whether client consent under DR 5- 105(C) would permit the multiple representation depends on an evaluation of the facts of the case and the position of the parties. It is clear, for example, that a lawyer could not seek client consent to represent a trustee in challenging the validity or amount of a client’s claim while at the same time prosecuting that claim against the estate. See N.Y. County 671 (1989); EC 5- 15. In that situation, it is not “obvious” that the representation of the bankruptcy trustee will not be influenced or adversely affected by the lawyer’s representation of the creditor.
In the inquiry presented, however, the potential or actual conflict between the trustee and the creditors represented by the inquiring law firm is too attenuated to preclude client consent to the multiple representation. The trustee seeks to retain the inquirer to prosecute against a secured creditor a claim that, if successful, would increase the assets of the estate available to all creditors, including the law firm’s existing creditor clients. Therefore, unless representation of the existing creditor clients would be influenced or adversely affected by the lawyer’s representation of the bankruptcy trustee in the unrelated action against another creditor, consent obtained under DR 5-105(C) would permit the proposed representation (assuming, as earlier noted, that the representation is permitted under applicable law).
Nevertheless, the inquirer must be alert to circumstances that might make the multiple representation improper. We assume from the facts given that representation of the bankruptcy trustee will not enable the inquirer to obtain some advantage in its representation of the creditor clients. Conversely, our conclusion assumes that the inquirer will obtain no advantage for the bankruptcy trustee by reason of serving as counsel to creditors of the estate. The multiple representation might also be improper if pursuit of the trustee’s claim requires the inquirer to advance a legal argument or establish facts adverse to the position of its creditor clients in the action against the debtor’s principal, and vice versa. In these circumstances, it may not be “obvious” that the law firm can adequately represent the interests of both sets of clients even with consent.
Finally, the inquirer must be alert to preserve the confidences and secrets of all of its clients in accordance with the mandate of DR 4-101(B). The representation of the bankruptcy trustee may give the law firm access to confidences or secrets of the trustee that bear on the claims of the firm’s creditor clients, either in the bankruptcy or in the state court litigation. The law firm must preserve the trustee’s confidences and secrets, DR 4-101(B), which duty survives the termination of’ the representation. DR 5-108; EC 4-6. The inquirer may not use such information without the trustee’s consent after full disclosure. DR 4-101(C) (1). If the law firm’s duty to use such information in its representation of its creditor clients conflicts with the duty of confidentiality owed to the trustee, the law firm would be precluded from continuing the multiple representation. See N.Y. County 707 (1995); N.Y. County 671. The possibility of this situation must be explained to the parties at the outset as part of the process of obtaining informed consent under DR 5-105(C).
A law firm may represent a bankruptcy trustee as special counsel in an action against a secured creditor of the debtor while simultaneously representing other creditors who hold claims against the debtor’s estate, provided that the proposed representation will not influence or adversely affect the law firm’s representation of any of the clients, all of the clients consent to the multiple representation after full disclosure, and the representation will not require the law firm to compromise its duty of confidentiality to any of the clients proposed to be ‘ represented.
September 29, 1995