Some Local Flavor on the Role of Local Counsel in Large Bankruptcy Cases

On Dec. 2, 2009, perceptive lawyers may have noticed a small disturbance in the force. This phenomenon was the result of the collective shudder issued by Delaware barred lawyers upon reading a seemingly innocuous letter from a vice chancellor of the Court of Chancery of the State of Delaware. [1] This letter offered a stark reminder that in the Delaware state courts, there is no such role as “local counsel.” [2] Characterizing the Delaware lawyer in a co-counsel relationship as having “fundamental responsibility for the Delaware proceeding,” the vice chancellor instructed that “[i]t is the Delaware lawyer’s responsibility to ensure that the arguments being made are appropriate.” [3] The vice chancellor cautioned further that “[a] Delaware lawyer cannot abdicate his or her obligations or cede them to forwarding counsel.” [4]

Now, the notion that a Delaware barred lawyer cannot limit his or her responsibilities to the court by adopting the moniker “local counsel” is hardly new. For example, the Delaware district and bankruptcy courts have long had in place rules requiring affiliation with a Delaware barred lawyer and for Delaware co-counsel to have a robust role. [5] Subject to narrow exceptions, Delaware co-counsel are required to, among other things, attend all court proceedings and sign all papers filed with the clerk. [6] The latter obligation means that Delaware co-counsel are required to certify under Bankruptcy Rule 9011 that such filings have been made for a proper purpose and have legal and factual support. [7]

Particular challenges present themselves in the context of a co-counsel practice involving large and complex chapter 11 reorganization cases. The reality of many large chapter 11 cases is that they create such a massive need for legal services that no one lawyer can be master of the chapter 11 domain. Allocation of responsibility among counsel is inevitable. Moreover, few clients (and even fewer still among those clients who have sought bankruptcy protection and often must be responsible for paying the fees of professionals for a creditors’ committee and lenders) are willing to pay for multiple sets of their own lawyers to vet every factual allegation and legal argument that appears in a filing. Of necessity, local counsel are constrained to rely on representations made to them by forwarding counsel that the positions being taken are proper and appropriately grounded in the facts and law.

What is the “local counsel” bankruptcy lawyer to do? The answer depends to some degree on where he or she is barred and practicing. In a handful of jurisdictions, after admission pro hac vice has been granted to outside counsel, no affiliation with local counsel is required. [8] Other jurisdictions do not require local counsel to sign court filings or attend court hearings. [9] In these jurisdictions, local counsel should take the opportunity to clearly define and limit the scope of their representation in their engagement with the client and referring counsel. [10]

What about those jurisdictions, like Delaware, where a limited role for local counsel is not expressly sanctioned by rule or practice? In these locales, local counsel must strike an appropriate balance between avoiding duplication of effort with lead counsel and fulfilling their Bankruptcy Rule 9011 obligations and other duties to the court and their clients. The job is not always easy, but most bankruptcy judges are realistic about what local counsel can and cannot control. In my experience, Delaware bankruptcy judges count on local counsel to ensure that a bankruptcy case is conducted in a manner consistent with their expectations. There are several ways this manifests in Delaware venued bankruptcy cases.

First, Delaware bankruptcy attorneys are expected to ensure that their co-counsel are familiar and comply with the local rules and standing orders. Delaware Local Bankruptcy Rule 3007-1, for example, dictates detailed requirements for the formatting and organization of omnibus claims objections. [11] Similarly, Local Rules 4001-2 and 6004-1 contain, respectively, specific disclosure requirements for debtor-in-possession (DIP) financing motions and sale motions. [12]

Second, Delaware bankruptcy attorneys are expected to educate co-counsel in the “lore” of what is and is not acceptable in Delaware bankruptcy courts. Knowledge, for example, of what procedures for § 366 utility adequate assurance demands that a Delaware bankruptcy judge will approve does not appear in any reported case or local rule. Unless referring counsel frequently appears in Delaware bankruptcy courts, such knowledge may reside only with the judges and Delaware co-counsel.

Another famous example (at least within the confines of the Delaware bankruptcy bar) is Judge Peter J. Walsh’s open letter concerning first-day DIP financing orders, which was addressed specifically to “Delaware Bankruptcy Counsel.” [13] In the letter, he gives specific guidance about what provisions he views as inappropriate in first day DIP financing orders. [14] The clear import of Judge Walsh’s letter is that he expects the Delaware bankruptcy bar to share this knowledge with referring counsel.

A third responsibility for which Delaware bankruptcy judges rely heavily on the Delaware bankruptcy bar to fulfill is to ensure that bankruptcy cases are conducted with a measure of civility. Large chapter 11 cases have a variety of constituencies with discrete, and often conflicting, agendas. The lead counsel representing these parties often have limited prior experience with one another, creating situations where distrust and unpleasantness can take hold. Many judges perceive that, without some assistance from the local bar, there is a real threat of chaos or stalemate overtaking some bankruptcy cases. In my nearly 15 years of practice, it has happened more than once that the court has summoned Delaware barred attorneys to chambers (often without lead counsel in attendance) to express concern about the direction a case has taken and to urge Delaware counsel to help correct the tone of the proceedings. Delaware counsel, who often have frequent dealings with one another and make repeated appearances before the same bankruptcy judges, are uniquely positioned and motivated to make sure such steps are taken.

A full exploration of all of the issues that potentially may arise in a co-counsel bankruptcy representation is well beyond the scope of this brief article. However, you should take away at least the important point that, in most jurisdictions, the full range of fiduciary duties and ethical obligations will apply to local counsel. Moreover, local counsel must remain vigilant to ensure, not only that they are complying with their own responsibilities, but also that lead counsel is doing the same.