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Navigating Ethical Challenges in Contested Restructurings: When Stakeholders Employ Ethics as a Sword November 28, 2011. Eighteenth Annual Distressed Investing 2011 Maximizing Profits in the Distressed Debt Market. - PowerPoint PPT Presentation


  • Navigating Ethical Challenges in Contested Restructurings:When Stakeholders Employ Ethics as a Sword

    November 28, 2011Eighteenth AnnualDistressed Investing 2011Maximizing Profits in the Distressed Debt Market

  • Navigating Ethical Challenges in Contested Restructurings:When Stakeholders Employ Ethics as a SwordVan E. ConwayChief Executive OfficerConway MacKenzieLois R. LupicaMaine Law Foundation Professor of LawUniversity of Maine Law SchoolMichael A. FederManaging DirectorAlixPartners LLPEdward T. GavinPrincipalNHB Advisors, Inc.Panel Moderator John Wm. (Jack) Butler, Jr.PartnerSkadden, Arps, Slate, Meagher & Flom LLP

  • Discussion TopicsDefining ethics and why it mattersThe differences between connections, differing interests and materially adverse interestsApplying ethics rules to non-lawyersUpdate on the ABI National Ethics Task ForceSelected ethics rules and revisiting the Universal Building Products decisionCommentary on Amended Bankruptcy Rule 2019 effective December 1, 2011 Disclosures regarding creditors and equity security holdersDeconstructing the Code: Ethics as a Sword

    Topic 5

  • Defining Ethicnoun, \e-thik\a set of moral principles; a theory or system of moral values (as in, the present-day materialistic ethic); the principles of conduct governing an individual or group (as in professional ethics).

    Assumes that a group has decided upon a specific moral code by which to be commonly bound.

  • Restructuring Stakeholders Equity CommitteeOfficial Committee of Unsecured CreditorsUnsecured Creditors ShareholdersAd Hoc CommitteeMembers of Ad Hoc CommitteeSteering Committee/ AgentSecured CreditorsIndenture TrusteeBondholders

  • Range of ConnectivityInterest Adverse to the EstateDiffering InterestConnectionDiffering InterestConnectionNo ConnectionMaterially Adverse Interest to the Estate (not disinterested)DisqualifiedFed. R. Bankr. P. 2014 requires disclosure of all connections that are not de minimis.A lawyer shall not represent a client if such representation involves a differing interest unless certain waiver requirements are met.Debtors counsel must be attorneys that do not hold or represent an interest adverse to the estate, and that are disinterested persons. 11 U.S.C. 327(a). Section 101(14)(C) defines a disinterested person as a person that 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 other reason. The Bankruptcy Code specifically authorizes an attorney to concurrently represent a debtor-in-possession and a creditor (in an unrelated matter). 11 U.S.C. 327(c) ([A] person is not disqualified for employment under this section solely because of such persons employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.).

  • Applying Ethics to Members of Trade Associations (including non-lawyers)Example, the Turnaround Management Association has three broad sections:Canon I Obligations to ProfessionalismEthical Standard 1.4 Human RightsCanon II Obligations to the ClientEthical Standard 2.2 IndependenceEthical Standard 2.4 Candor & TruthfulnessEthical Standard 2.7 OwnershipCanon III Obligations to the ProfessionEthical Standard 3.1 Prohibition on Referral Consideration

  • The Rules of Professional ConductThe TMA Code of Ethics draws from the ABA Model Rules for Lawyers:Model Rule 1.10 Conflicts of InterestModel Rule 1.4 CommunicationsModel Rules 7.3 & 8.4, taken togetherEstablished by the American Bar Association (ABA) as Model Rules.Adopted in some form by individual states as ethics rules.

  • ABI National Ethics Task ForceConsider ethics issues in bankruptcy practice and make recommendations for uniform standards where appropriateWhy a Task Force at all?Bankruptcy practice has significantly evolved since the MRPC and many local rules were promulgatedBankruptcy is now a multi-jurisdictional, if not multi-national, practiceABA standards, developed primarily for nonfederal, nonbankruptcy courts by unelected and nonjudicial parties, are ill-adapted to federal bankruptcy proceedings. (Ninth Circuit Court of Appeals, In re Nguyen)Increased discussion, nationally, regarding adoption of civility guidelines (such as those adopted in E.D. NY)

  • ABI National Ethics Task ForceInitial Focus:Competence to practice bankruptcy lawConflicts of interestDisclosure IssuesFee arrangementsSupervision of legal and non-legal staffLimited representationVolume practice issuesMulti-jurisdictional practiceCommittee solicitation & representationFiduciary duties owed by professionals

  • ABI National Ethics Task ForceCommittees established to address areas of focus:Conflicts of InterestRetention, Disclosure & Fee ArrangementsCreditors CommitteesConsumerLimited Representation/Multijurisdictional PracticeDiscipline, Sanctions & Competence

  • ABI National Ethics Task ForceProposal for consideration of the need for a National Bankruptcy BarResponse to the growing number of instances of attorneys sanctioned for ethics and/or civility lapses, including:Insulting the Court;Fee-related lapses and violations of fiduciary duties;Sloppy paperwork;Unlawful practice of law by non-attorneys;Impermissible limitations on scope of representationCould use Fed. R. Bankr. P. 9029 as a basisAbility to practice in Bankruptcy Court of any District would be subject to a set of national standards in addition to Local Rules and underlying State RulesTaken up by Federal Rules Committee for consideration


    1.10(a) states generally that a firm of many professionals is essentially one professional for purposes of establishment of conflicts of interest (i.e., a conflict on the part of a single professional is a conflict to the entire firm) unless:the professional with the conflict is timely screened from the conflict, andwritten notice is promptly given to the other client to enable them to ascertain compliance with this Rule

    Doesnt apply to non-attorneys, but is a good thing to keep in mind in restructuring practice


    (a)(2) [A lawyer shall] reasonably consult with the client about the means by which the clients objectives are to be accomplished;(a)(3) [A lawyer shall] keep the client reasonably informed about the status of the matter;(a)(5) [A lawyer shall] consult with the client about any relevant limitation on the lawyers conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.


    A lawyer shall not by in-person, live telephone or real-time electronic contact solicit professional employment from a prospective client when a significant motive for the lawyers doing so is the lawyers pecuniary gain, unless the person contacted: (1) is a lawyer; or (2) has a family, close personal, or prior professional relationship with the lawyer.


    It is professional misconduct for a lawyer to:(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another

  • Retention Risks When Soliciting Potential Committee MembersA recent Delaware Bankruptcy Court opinion, In re Universal Building Products, provides a cautionary example to professionals seeking committee representationIn Universal Building Products, the court found that counsel had used a proxy to solicit potential members of a creditors committeeThe court denied counsels retention application based on both ethical grounds and lack of disclosure

  • Retention Risks When Soliciting Potential Committee MembersThe Court found that counsel had violated a rule of professional conduct prohibiting certain forms of direct solicitation of prospective clientsIn particular, the court focused on counsels lack of a prior relationship with the creditorsCounsel and some commentators have argued that this impinges on counsels First Amendment rights due to the sophistication of the parties

  • Retention Risks When Soliciting Potential Committee MembersThe court also found that disqualification of counsel was appropriate because counsel failed to provide adequate disclosure regarding connections with the proxy who solicited potential committee membersThe court emphasized the importance of complete disclosure of all contactsCounsels subsequent disclosure of relationship with proxy did not cure the initial defective disclosure

  • Rule 2019 Where We Are Now2007 Northwest Airlines Court applies Rule 2019 to ad hoc committee of equity security holdersScotia Development Court finds Rule 2019 in applicable to ad hoc committee of noteholders1930s to 2007 Relative quiet in 2019 Litigation2009 LyondellBasell Court orders an ad hoc group to disclose members bond and credit default swap positionsWashington Mutual - Court applies Rule 2019 to ad hoc committee of noteholders1937 Original Rule 2019 EnactedAug. 2009 - Significant revisions to Rule 2019 announced 2009-2011 Revisions to Rule 2019 proposed and comments solicited2007 to 2010 Rash of conflicting decisions regarding application of Rule 20192010 Six Flags - Court holds ad hoc group is beyond the