News flash: Bankruptcy lawyers are human beings. Some have human emotions. Sometimes, they fall in love and marry. They may even fall in love when their firms are adversaries.

Upholding a decision by retired Bankruptcy Judge Christopher S. Sontchi of Delaware, the Third Circuit described how firms should handle romances to avoid disqualification. Basically, the circuit says to employ an elaborate screen and follow the details described in the September 9 opinion by Circuit Judge David J. Porter.

The Conflict

A large company confirmed a chapter 11 plan in 2016, creating a liquidating trust. In June 2018, the trust filed a $14 billion lawsuit against the debtor’s former parent.

The trust-plaintiff was represented by a large, international law firm with more than 2,000 lawyers. The defendant-parent was represented by several other large firms.

A partner in one of the defendant’s firms left that firm and joined the plaintiff’s firm as a partner in October 2020. The departing partner had billed 300 hours to the case on behalf of the defendant. 

So far, nothing surprising. Moves like that take place all the time. Conflicts and disqualifications are avoided by ethical screens, and a screen is what the plaintiff’s firm put in place immediately after the move.

After the partner left the defendant’s firm to join the plaintiff’s firm, the defendant-parent filed a motion to disqualify the plaintiff’s law firm. Bankruptcy Judge Sontchi denied the motion. Maxus Liquidating Trust v. YPF SA (In re Maxus Energy Corp.), 626 B.R. 249 (Bankr. D. Del. April 6, 2021). To read ABI’s report, click here.

Here’s what makes the case different: The department head for the plaintiff was in a romantic relationship with the defendant’s departing partner. The relationship turned into marriage. The department head at the plaintiff’s firm never billed any time to the matter.

According to the opinion by Bankruptcy Judge Sontchi, the timeline for the relationship went like this:

The two began dating in early 2017. The lawsuit was filed in 2018. The relationship became “exclusive” in the fall of 2018, and they began living together in July 2019. 

Judge Sontchi found that the partner who moved had disclosed the relationship to the firm in 2018 and believed that the relationship had been disclosed to the defendant. The lawyer with the defendant’s firm joined the plaintiff’s firm as a partner on October 1, 2020. They married in November 2020.

As previously mentioned, the plaintiff’s firm set up an ethical screen immediately after the move and notified the defendant.

After denying the motion for disqualification, Judge Sontchi authorized a direct appeal, which the Third Circuit accepted.

The Affirmance

Because the appeals court was reviewing for abuse of discretion, the affirmance by Judge Porter is sparse, compared to the meticulous opinion by Bankruptcy Judge Sontchi. Judge Porter said that “an abuse of discretion occurs ‘where no reasonable person would adopt’ the lower court’s view. United States v. Foster, 891 F.3d 93, 107 n.11 (3d Cir. 2018).”

Judge Porter explained that the bankruptcy court in Delaware has adopted the American Bar Association’s Model Rules of Professional Conduct as local rules. Model Rule 1.9 bars a client’s former lawyer from representing someone “materially adverse” on a “substantially related matter.” Model Rule 1.10(a) disqualifies an entire firm if one lawyer is disqualified “unless” the “disqualified lawyer is timely screened” and receives “no part” of the fee.

Summarizing the rules, Judge Porter said: 

[I]f a firm adheres to the conditions subsequent by screening the disqualified attorney, allocating to him no part of the fee from the conflicted representation, and following the other procedures in Model Rule 1.10(a)(2), the disqualified attorney’s conflict cannot be imputed to the entire firm.

Despite screening the departing partner and despite the departing partner’s exclusion from fees from the engagement, the defendant argued that the plaintiff’s firm was disqualified because the department head at the plaintiff’s firm had not been barred from receiving fees from the firm’s representation of the plaintiff.

Judge Porter rejected the argument. He said that “the rule directs that only the ‘disqualified lawyer’ must be ‘apportioned no part of the fee’ from the matter at issue. Model Rules of Pro. Conduct r. 1.10(a)(2)(i). Here, that means [the departing partner], not her spouse, must not receive proceeds of fees arising from the conflicted representation.”

Judge Porter affirmed because he found no abuse of discretion in denial of the disqualification motion. He said that the firm had established “a thorough, robust ethical screen.”

The Interesting Footnote

In text on the last page of the opinion, Judge Porter said that the departing partner would receive no part of the fees from the new firm’s representation of the plaintiff. In a footnote, he said that the plaintiff’s firm did not compensate partners “based on specific case outcomes or earnings.”

Although the Model’s Rule’s comments are not incorporated into the Delaware local rules, Judge Porter said that a comment on Rule 1.10 “persuasively says” that a screened lawyer is not prohibited “‘from receiving a salary or partnership share established by prior independent agreement, but that lawyer may not receive compensation directly related to the matter in which the lawyer is disqualified. Model Rules of Pro. Conduct r. 1.10, cmt 8.’”

The footnote appears to be dicta allowing screened lawyers to suffer no cut in compensation as long as the lawyer’s earnings are not “directly related” to the matter giving rise to the conflict.

Observations

Whenever two lawyers kiss, and they’re from different firms, must they run a conflict check? If a casual date doesn’t raise a potential conflict, when does a conflict arise as the relationship becomes “serious”? When should both lawyers notify their firms? Do firms really want to know whom their lawyers are dating? Are the rules different if one or both of the lawyers are married to someone else?

Respectfully, the Model Rules don’t give answers. 

The Model Rules also don’t deal with potential conflicts arising from working at home, when the couple are lawyers from different firms. Must each lawyer have a computer that the other can’t use? What about overhearing phone conversations? To be safe, must the lawyers work from separate, soundproof rooms? Is there automatically a conflict if a couple, both lawyers, are in firms that are adversaries but neither is working on the matter? When must there be disclosure and screening?

Respectfully, the Model Rules don’t give answers. This writer submits that the ABA should amplify the rules to deal with personal relationships and working from home. Remember, the rules were written when few women were lawyers and everyone worked in the office.

Without better rules, perfectly innocent lawyers will be in a world of hurt if a court applies the existing rules rigorously.