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Lawyers Beware
David,
You are absolutely correct! We each need to be very much aware,
especially in a business case, who we truly represent. And, that
entity is the corporate entity, not management, for the benefit of the
estate, which includes the effective reorganization of the corporate
entity, with a fiduciary duty to the estate. By analogy, we should
take from this case the effective representation of a chapter 13
debtor seeking to reorganize. Let's have a discussion about the case
at the next meeting and try to get a consensus on how the membership
would want to board to approach the issue with, for example, the OUST
and the Courts. Maybe a LBR Committee issue?
Best regards. Lou
>
> I see this as serious erosion of the attorney/client privilege, our
duty of
> zealous advocacy (no, I am not condoning illegal activity), and a
chill on
> our role as attorneys since our actions can be retroactively
examined and
> re-characterized should it SUBSEQUENTLY be discovered that our
clients have
> acted improperly and we had ANY HINT that such was the case.
>
> Anyway, each of you will take from the case whatever you decide. I
thought
> it appropriate to sound an alarm.
>
> David A. Tilem
> Certified Bankruptcy Specialist*
> Law Offices of David A. Tilem (a debt relief agency)
> 206 N. Jackson Street, #201, Glendale, CA 91206
> Tel: 818-507-6000 Fax: 818-507-6800
>
> * Bankruptcy specialist cert. by State Bar of CA Bd of Legal
> Specialization.
> Business bankruptcy specialist cert. by Amer. Bd. of Certification
>
>
>
Behalf Of
> Law Offices of Louis J. Esbin
> Sent: Saturday, February 09, 2008 8:35 PM
> To: cdcbaa@yahoogroups.com
> Subject: [cdcbaa] Re: Lawyers Beware
>
>
> David,
>
> I don't think the law on this subject is anything new. After all, as
> Chapter 11 counsel the attorneys are employed by the Court for the
> estate and owe a duty to the estate and its creditors. Management, as
> a matter of California corporate law owes a duty to creditors upon the
> insolvency of a corporate entity, and upon filing, the estate in
> general. I think what the case says from a practice perspective, in
> both Chapter 11 and 13 cases, is that we need to provide our clients
> with what their duties are and what our duties are to the estate and
> the court. I faintly remember years ago, the firm I was employed by
> had a client whose management was less than honest, and I seem to
> recall that we documented the file and our admonishment to management
> before we filed a motion to appoint a trustee.
>
> Best regards. Lou
>
> --- In cdcbaa@yahoogroups. com,
"David A.
> Tilem" wrote:
> >
> > While many of you do not do Chapter 11 cases, the logic of this case
> applies
> > equally to chapter 13 cases. And if you do handle Chapter 11
> cases, this
> > is even more of a warning. The following case analysis was prepared by
> > Professor Dan Schechter, Loyola School of Law for the Insolvency Law
> > Committee - Business Law Section of the State Bar of California
> >
> >
> >
> >
> >
> >
> ----------------------------------------------------------
> >
> > Attorneys for Chapter 11 Debtor Who Suspect That Insiders May Be
> > Self-Dealing but Who Do Not Advise the Court May Be Held Liable for
> Breach
> > of Fiduciary Duty to the Estate. [In re Food Management Group, LLC,
> 2008
> > Westlaw 183410 (Bankr. S.D.N.Y.).]
> >
> >
> >
> > A bankruptcy court in New York has held that when an attorney for a
> Chapter
> > 11 debtor in possession suspects that the DIP's insiders are
engaged in
> > self-dealing, the attorney must advise the court of that fact or
> else risk
> > liability for breach of fiduciary duty to the estate. [In re Food
> > Management Group, LLC, 2008 Westlaw 183410 (Bankr. S.D.N.Y.).]
> >
> >
> >
> > Facts: In the context of a Chapter 11 proceeding, the debtor in
> possession
> > sought to sell substantially all of its property. The attorneys
> > representing the DIP prepared the papers for that sale; among other
> things,
> > the DIP's procedures required that each bidder submit a registration
> form
> > certifying that the bidder was not an insider of the DIP.
> >
> >
> >
> > During the DIP's negotiations with a potential bidder, the attorneys
> for the
> > DIP became suspicious that one of the insiders might be involved
> with the
> > bidder, behind the scenes. The attorneys warned the parties not to
> involve
> > any of the insiders. The same attorneys later submitted the
> transaction to
> > the court for its approval, but the court was not advised that the new
> > bidders had failed to provide the required certification regarding the
> > absence of involvement by the insiders.
> >
> >
> >
> > Eventually, the truth came out. Following the appointment of a
> Chapter 11
> > trustee, the trustee brought suit against the insiders and the
> attorneys for
> > breach of fiduciary duty. The attorneys moved to dismiss for lack of
> > standing, claiming that the DIP was in pari delicto ("in equal
> fault"), thus
> > barring the estate from bringing suit. The attorneys also claimed
> that they
> > owed no fiduciary duty to the estate at large.
> >
> >
> >
> > Reasoning: The court first held that although the doctrine of in pari
> > delicto might apply if the prepetition debtor had brought suit
against a
> > faithless insider, the rule did not apply where the alleged
> misconduct took
> > place post-petition. Noting a split of authority, the court then
> held that
> > the attorneys owed a fiduciary duty to the estate, in addition to
their
> > duties to the DIP.
> >
> >
> >
> > The attorneys argued that they were not responsible for ensuring
> that the
> > DIP would comply with the disclosure requirements. The court
disagreed:
> > [The attorneys] are correct to a point in arguing that they had no
> > obligation to "ensure" [their] clients' compliance with agreements.
> While
> > counsel's duty to the estate may not rise to the level of a
> policeman for
> > the debtor's post-petition conduct, an attorney for the debtor in
> possession
> > has fiduciary obligations to the estate stemming from his fiduciary
> > obligations to the debtor in possession and his responsibilities as an
> > officer of the court . . . . [T]he attorney cannot simply close his
> or her
> > eyes to matters having an adverse legal and practical consequence
> for the
> > estate and creditors . . . . [Bracketed material added; citations and
> > internal punctuation omitted.]
> >
> >
> >
> > COMMENT: What should these attorneys have done? Blow the whistle?
> > Withdraw suddenly and awkwardly? These attorneys did not know that the
> > insiders were preparing to engage in self-dealing. They suspected
> it, and
> > they warned the insiders not to do so. The insiders disregarded the
> > warning, and the attorneys now face liability for failing to act.
> If the
> > attorneys for the DIP merely suspect wrongdoing, do they have an
> obligation
> > to betray their client's confidences and advise the court? It seems
> that
> > this is the implication of the court's opinion.
> >
> >
> >
> > This case is another in a series involving Chapter 11 counsel caught
> between
> > conflicting duties. I think that the moral of all of these cases is
> clear:
> > although the attorneys for the DIP owe all of the usual duties to
their
> > immediate client, they owe a higher duty to the estate and to the
court.
> >
> >
> ----------------------------------------------------------
> >
> >
> >
> >
> >
> > As they used to say on the TV show Hill Street Blues: "be careful out
> > there".
> >
> >
> >
> >
> > David A. Tilem
> > Certified Bankruptcy Specialist*
> > Law Offices of David A. Tilem (a debt relief agency)
> > 206 N. Jackson Street, #201, Glendale, CA 91206
> > Tel: 818-507-6000 Fax: 818-507-6800
> >
> > * Bankruptcy specialist cert. by State Bar of CA Bd of Legal
> > Specialization.
> > Business bankruptcy specialist cert. by Amer. Bd. of Certification
> >
>
The post was migrated from Yahoo.
I see this as serious erosion of the attorney/client privilege, our duty of
zealous advocacy (no, I am not condoning illegal activity), and a chill on
our role as attorneys since our actions can be retroactively examined and
re-characterized should it SUBSEQUENTLY be discovered that our clients have
acted improperly and we had ANY HINT that such was the case.
Anyway, each of you will take from the case whatever you decide. I thought
it appropriate to sound an alarm.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
The post was migrated from Yahoo.
David,
I don't think the law on this subject is anything new. After all, as
Chapter 11 counsel the attorneys are employed by the Court for the
estate and owe a duty to the estate and its creditors. Management, as
a matter of California corporate law owes a duty to creditors upon the
insolvency of a corporate entity, and upon filing, the estate in
general. I think what the case says from a practice perspective, in
both Chapter 11 and 13 cases, is that we need to provide our clients
with what their duties are and what our duties are to the estate and
the court. I faintly remember years ago, the firm I was employed by
had a client whose management was less than honest, and I seem to
recall that we documented the file and our admonishment to management
before we filed a motion to appoint a trustee.
Best regards. Lou
>
> While many of you do not do Chapter 11 cases, the logic of this case
applies
> equally to chapter 13 cases. And if you do handle Chapter 11
cases, this
> is even more of a warning. The following case analysis was prepared by
> Professor Dan Schechter, Loyola School of Law for the Insolvency Law
> Committee - Business Law Section of the State Bar of California
>
>
>
>
>
>
>
> Attorneys for Chapter 11 Debtor Who Suspect That Insiders May Be
> Self-Dealing but Who Do Not Advise the Court May Be Held Liable for
Breach
> of Fiduciary Duty to the Estate. [In re Food Management Group, LLC,
2008
> Westlaw 183410 (Bankr. S.D.N.Y.).]
>
>
>
> A bankruptcy court in New York has held that when an attorney for a
Chapter
> 11 debtor in possession suspects that the DIP's insiders are engaged in
> self-dealing, the attorney must advise the court of that fact or
else risk
> liability for breach of fiduciary duty to the estate. [In re Food
> Management Group, LLC, 2008 Westlaw 183410 (Bankr. S.D.N.Y.).]
>
>
>
> Facts: In the context of a Chapter 11 proceeding, the debtor in
possession
> sought to sell substantially all of its property. The attorneys
> representing the DIP prepared the papers for that sale; among other
things,
> the DIP's procedures required that each bidder submit a registration
form
> certifying that the bidder was not an insider of the DIP.
>
>
>
> During the DIP's negotiations with a potential bidder, the attorneys
for the
> DIP became suspicious that one of the insiders might be involved
with the
> bidder, behind the scenes. The attorneys warned the parties not to
involve
> any of the insiders. The same attorneys later submitted the
transaction to
> the court for its approval, but the court was not advised that the new
> bidders had failed to provide the required certification regarding the
> absence of involvement by the insiders.
>
>
>
> Eventually, the truth came out. Following the appointment of a
Chapter 11
> trustee, the trustee brought suit against the insiders and the
attorneys for
> breach of fiduciary duty. The attorneys moved to dismiss for lack of
> standing, claiming that the DIP was in pari delicto ("in equal
fault"), thus
> barring the estate from bringing suit. The attorneys also claimed
that they
> owed no fiduciary duty to the estate at large.
>
>
>
> Reasoning: The court first held that although the doctrine of in pari
> delicto might apply if the prepetition debtor had brought suit against a
> faithless insider, the rule did not apply where the alleged
misconduct took
> place post-petition. Noting a split of authority, the court then
held that
> the attorneys owed a fiduciary duty to the estate, in addition to their
> duties to the DIP.
>
>
>
> The attorneys argued that they were not responsible for ensuring
that the
> DIP would comply with the disclosure requirements. The court disagreed:
> [The attorneys] are correct to a point in arguing that they had no
> obligation to "ensure" [their] clients' compliance with agreements.
While
> counsel's duty to the estate may not rise to the level of a
policeman for
> the debtor's post-petition conduct, an attorney for the debtor in
possession
> has fiduciary obligations to the estate stemming from his fiduciary
> obligations to the debtor in possession and his responsibilities as an
> officer of the court . . . . [T]he attorney cannot simply close his
or her
> eyes to matters having an adverse legal and practical consequence
for the
> estate and creditors . . . . [Bracketed material added; citations and
> internal punctuation omitted.]
>
>
>
> COMMENT: What should these attorneys have done? Blow the whistle?
> Withdraw suddenly and awkwardly? These attorneys did not know that the
> insiders were preparing to engage in self-dealing. They suspected
it, and
> they warned the insiders not to do so. The insiders disregarded the
> warning, and the attorneys now face liability for failing to act.
If the
> attorneys for the DIP merely suspect wrongdoing, do they have an
obligation
> to betray their client's confidences and advise the court? It seems
that
> this is the implication of the court's opinion.
>
>
>
> This case is another in a series involving Chapter 11 counsel caught
between
> conflicting duties. I think that the moral of all of these cases is
clear:
> although the attorneys for the DIP owe all of the usual duties to their
> immediate client, they owe a higher duty to the estate and to the court.
>
>
-
>
>
>
>
>
> As they used to say on the TV show Hill Street Blues: "be careful out
> there".
>
>
>
>
> David A. Tilem
> Certified Bankruptcy Specialist*
> Law Offices of David A. Tilem (a debt relief agency)
> 206 N. Jackson Street, #201, Glendale, CA 91206
> Tel: 818-507-6000 Fax: 818-507-6800
>
> * Bankruptcy specialist cert. by State Bar of CA Bd of Legal
> Specialization.
> Business bankruptcy specialist cert. by Amer. Bd. of Certification
>
The post was migrated from Yahoo.
While many of you do not do Chapter 11 cases, the logic of this case applies
equally to chapter 13 cases. And if you do handle Chapter 11 cases, this
is even more of a warning. The following case analysis was prepared by
Professor Dan Schechter, Loyola School of Law for the Insolvency Law
Committee - Business Law Section of the State Bar of California
Attorneys for Chapter 11 Debtor Who Suspect That Insiders May Be
Self-Dealing but Who Do Not Advise the Court May Be Held Liable for Breach
of Fiduciary Duty to the Estate. [In re Food Management Group, LLC, 2008
Westlaw 183410 (Bankr. S.D.N.Y.).]
A bankruptcy court in New York has held that when an attorney for a Chapter
11 debtor in possession suspects that the DIP's insiders are engaged in
self-dealing, the attorney must advise the court of that fact or else risk
liability for breach of fiduciary duty to the estate. [In re Food
Management Group, LLC, 2008 Westlaw 183410 (Bankr. S.D.N.Y.).]
Facts: In the context of a Chapter 11 proceeding, the debtor in possession
sought to sell substantially all of its property. The attorneys
representing the DIP prepared the papers for that sale; among other things,
the DIP's procedures required that each bidder submit a registration form
certifying that the bidder was not an insider of the DIP.
During the DIP's negotiations with a potential bidder, the attorneys for the
DIP became suspicious that one of the insiders might be involved with the
bidder, behind the scenes. The attorneys warned the parties not to involve
any of the insiders. The same attorneys later submitted the transaction to
the court for its approval, but the court was not advised that the new
bidders had failed to provide the required certification regarding the
absence of involvement by the insiders.
Eventually, the truth came out. Following the appointment of a Chapter 11
trustee, the trustee brought suit against the insiders and the attorneys for
breach of fiduciary duty. The attorneys moved to dismiss for lack of
standing, claiming that the DIP was in pari delicto ("in equal fault"), thus
barring the estate from bringing suit. The attorneys also claimed that they
owed no fiduciary duty to the estate at large.
Reasoning: The court first held that although the doctrine of in pari
delicto might apply if the prepetition debtor had brought suit against a
faithless insider, the rule did not apply where the alleged misconduct took
place post-petition. Noting a split of authority, the court then held that
the attorneys owed a fiduciary duty to the estate, in addition to their
duties to the DIP.
The attorneys argued that they were not responsible for ensuring that the
DIP would comply with the disclosure requirements. The court disagreed:
[The attorneys] are correct to a point in arguing that they had no
obligation to "ensure" [their] clients' compliance with agreements. While
counsel's duty to the estate may not rise to the level of a policeman for
the debtor's post-petition conduct, an attorney for the debtor in possession
has fiduciary obligations to the estate stemming from his fiduciary
obligations to the debtor in possession and his responsibilities as an
officer of the court . . . . [T]he attorney cannot simply close his or her
eyes to matters having an adverse legal and practical consequence for the
estate and creditors . . . . [Bracketed material added; citations and
internal punctuation omitted.]
COMMENT: What should these attorneys have done? Blow the whistle?
Withdraw suddenly and awkwardly? These attorneys did not know that the
insiders were preparing to engage in self-dealing. They suspected it, and
they warned the insiders not to do so. The insiders disregarded the
warning, and the attorneys now face liability for failing to act. If the
attorneys for the DIP merely suspect wrongdoing, do they have an obligation
to betray their client's confidences and advise the court? It seems that
this is the implication of the court's opinion.
This case is another in a series involving Chapter 11 counsel caught between
conflicting duties. I think that the moral of all of these cases is clear:
although the attorneys for the DIP owe all of the usual duties to their
immediate client, they owe a higher duty to the estate and to the court.
-
As they used to say on the TV show Hill Street Blues: "be careful out
there".
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Message
While many of you do not do Chapter 11 cases, the logic
of this case applies equally to chapter 13 cases. And if you dohandle Chapter 11 cases, this is even more of a warning.
The following case analysis was prepared by
Professor Dan
Schechter, Loyola School of Law for
the Insolvency Law Committee - Business Law Section of the
State Bar of
The post was migrated from Yahoo.