Retention of Counsel in Chapter 11 Proceedings
11 U.S.C. § 327(a) permits a debtor to employ an attorney that (1) does not “hold or represent and interest adverse to the estate”; and (2) is disinterested. 11 U.S.C. § 327(a). The Bankruptcy Code defines “disinterested person” as “a person that– (A) is not a creditor, an equity security holder, or an insider; (B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (C) 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, or for any reason.”11 U.S.C. § 101(14).
The Bankruptcy Code does not define the phrase “hold or represent an interest adverse to the estate.” However, most Courts adopt the definition in In re Roberts, 46 B.R. 815 (Bankr. D. Utah 1985), aff’d in relevant parts and rev’d and remanded in part on other grounds, 75 B.R. 402 (D. Utah 1987). The Court in In re Roberts construed the phrase “hold an adverse interest” to mean: for two or more entities (1) to possess … an economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate. Id. At 826-827.
“[C]ourts determine whether an adverse interest exists on a case-by-case basis, examining the specific facts in a case.” In re JMK Construction Group, Ltd., 441 B.R. 222, 230 (Bankr. S.D.N.Y. 2010); see also In re Renaissance Residential of Countryside, LLC, 423 B.R. 848, 857 (Bankr. N.D. Ill. 2010); In re Fretter, Inc., 219 B.R. 769, 778 (Bankr. N.D. Ohio 1998) (“There is no bright line rule regarding this [adverse interest] basis for disqualification as ‘[t]his inquiry is of necessity case-specific.’”) (quoting In re Martin, 817 F.2d 175, 180 (1st Cir. 1987)). Moreover, “[b]ecause the few absolute disqualifications Congress has established are carefully delineated and narrowly tailored, the courts must take care not to fashion absolute prohibitions beyond those legislatively mandated without some measure of assurance that the purposes of the Bankruptcy Code always will be served thereby.” In re Harold & Williams Development Co., 977 F.2d 906, 909-10 (4th Cir. 1992).
In dealing with a disqualification motion a judge must balance several competing interests such as: a party’s right to counsel of his own choice, Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 564–65 (2d Cir. 1973); the needs of efficient judicial administration against the potential advantage of immediate measures, Board of Education of the City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979); the lawyer’s duty to maintain the confidences of his clients, Evans v. Artek Systems Corp., 715 F.2d 788, 791 (2d Cir. 1983); and, the client’s expectation that a lawyer will exercise independent judgment on its behalf. See, Trone v. Smith, 621 F.2d 994 (9th Cir. 1980).
There is a high standard of proof in a disqualification proceeding. Evans v. Artek Systems Corp., supra, 715 F.2d at 794. Mere hypothetical conflicts do not meet the heavy burden of proof to warrant disqualification of DIP’s attorney. In re Stamford Color Photo, Inc., 19 B.C.D. 77, 98 B.R. 135, 137 (Bankr. Conn. 1989). “‘[I]nterests are not considered “adverse” merely because it is possible to conceive a set of circumstances under which they might clash.” In re Caldor, Inc., 193 B.R. 165, 172 (Bankr. S.D.N.Y. 1996) (quoting In re Leslie Fay Co., Inc., 175 B.R. 525, 532 (Bankr.S.D.N.Y. 1994)); (“[H]orrible imaginings alone cannot be allowed to carry the day. Not every conceivable conflict must result in sending counsel away to lick his wounds.”). In re Martin, 817 F.2d at 183. “Or in the night, imagining some fear, how easy is a bush supposed a bear.” In re Kelton Motors, Inc. 109 B.R. 641, 657 (Bankr. D. Vt. 1989) (quoting Shakespeare, A Midsummer Night’s Dream, Act V, Scene 1 (1594–1596)).