A lawyer who represented the chapter 11 debtor in possession wasn’t disqualified from representing a creditor sued by the liquidating trust created under a plan sponsored by the official creditors’ committee, for reasons described by Bankruptcy Judge David T. Thuma of Albuquerque, N.M.
Although not disqualified, the lawyer must live under strictures regarding the use of information gained while representing the debtor as DIP.
The Committee’s Liquidating Plan
The lawyer served as the chapter 11 debtor’s court-authorized general bankruptcy counsel for almost two years, including more than a year after confirmation of the committee’s liquidating plan.
In the schedules alongside the chapter 11 petition, the debtor listed a $217,000 debt owing to the county shown to be secured by a lien on all of the debtor’s property in the county. The county itself filed a claim for $235,000 secured by “real property” in the county.
Under the lawyer’s tutelage, the debtor filed a chapter 11 plan and disclosure statement showing the county to have a $235,000 secured claim. However, the debtor was unable to pursue confirmation.
The creditors’ committee stepped in with a liquidating plan of its own that Judge Thuma confirmed. The plan transferred all of the debtor’s property to a liquidating trust and gave the liquidating trustee the right to control the attorney/client privilege between the debtor and its lawyer.
After confirmation, the lawyer for the debtor continued representing the debtor in several miscellaneous proceedings in bankruptcy court.
After the lawyer’s last appearance for the debtor, the liquidating trustee objected to the county’s claim, contending that all but about $9,000 had been paid when the debtor’s property was sold. The county objected and responded by seeking authority to file an out-of-time claim for personal-property taxes on the debtor’s herd of cattle.
The Lawyer Reappears for a Creditor
The lawyer who had represented the debtor appeared in bankruptcy court on behalf of the county to oppose the claim objection and pursue the motion to file a claim for personal property taxes on cattle. The lawyer’s appearance was just short of two years after the chapter 11 filing and 14 months after confirmation of the committee’s plan.
The liquidating trustee moved to disqualify the lawyer, contending that the lawyer was becoming adverse to his own former client. Judge Thuma denied the disqualification motion in an opinion on December 2.
The Ethics Rules
Judge Thuma paraphrased the pertinent state rule of professional responsibility to mean that the lawyer would be disqualified from representing a new client if (1) he had a new client (2) whom he proposed to represent in a matter that was the same or substantially related to a matter on which he represented the former client and if (3) the interests of the new and former clients were “materially adverse.”
For Judge Thuma, the “crucial issue” was whether the liquidating trust was the lawyer’s “former client.” If it were, the judge said he would “likely” disqualify the lawyer.
The liquidating trustee argued that the trust and the debtor were one and the same because the trust inherited all of the debtor’s property, and the liquidating trustee controlled the debtor’s attorney/client privilege.
Judge Thuma observed that the liquidating plan was similar to a foreclosure, receivership or forced sale. “In those instances,” he said, “the attorney-client relationship does not necessarily follow the assets.”
To buttress his observation, Judge Thuma cited a decision where Bankruptcy Judge Robert E. Nugent dealt with a “similar issue” in Abengoa Bioenergy Biomass of Kansas LLC, 16–10446, 2018 WL 1321951 (D. Kan. 2018). He quoted Judge Nugent as having found no case in which a liquidating trustee became a chapter 11 debtor’s lawyer’s “former client.” Rather, Judge Nugent said, the liquidating trust was a “separate and distinct” entity from the debtor.
In the same vein, Judge Nugent said that assignment of the debtor’s attorney/client privilege did not turn the liquidating trust into a former client.
Judge Thuma further developed the assignment question by reference to Commodity Futures Trading Comm. v. Weintraub, 471 U.S. 343 (1985), where the Supreme Court held that a bankruptcy trustee supplants management and controls the privilege.
A liquidating trust is different, Judge Thuma said. A liquidating trustee takes over the assets free of the debtor’s corporate structure.
Unlike assignment of the attorney/client privilege, Judge Thuma held that “the attorney-client relationship is not assignable and was not assigned in this instance.” [Emphasis in original.] Thus, the liquidating trust was not the lawyer’s former client.
‘Same or Substantially Related’
Under another provision of the state’s ethics rules, the lawyer could be disqualified if the new assignment was the same or substantially related to the lawyer’s representation of the debtor.
Because the debtor did not reorganize and the liquidating trust was not the lawyer’s former client, Judge Thuma said that the matters were not substantially related.
‘Materially Adverse’
The debtor, Judge Thuma said, was an “empty shell” that was “out of business” and “indifferent to the outcome” of the claim objection. He therefore found that the debtor’s interests would not be materially adverse to the county’s.
Had the lawyer represented the trust, Judge Thuma said that the lawyer would have been disqualified.
Confidential Information
Because the liquidating trustee was controlling the attorney/client privilege, Judge Thuma said that the lawyer may neither use nor disclose “to anyone,” the county included, any privileged communications the lawyer had with the debtor.
On notice to the liquidating trustee, Judge Thuma gave the lawyer leave to apply to the court for permission to use privileged information. He also admonished the lawyer to withdraw if the lawyer were to determine that the inability to use confidential information “is materially limiting its representation of the County.”
A lawyer who represented the chapter 11 debtor in possession wasn’t disqualified from representing a creditor sued by the liquidating trust created under a plan sponsored by the official creditors’ committee, for reasons described by Bankruptcy Judge David T. Thuma of Albuquerque, N.M.
Although not disqualified, the lawyer must live under strictures regarding the use of information gained while representing the debtor as DIP.