The Caesars examiner's report makes for interesting reading. Of particular interest for our readers might be its discussion of the role of the lawyers, namely those at Paul Weiss, who simultaneously represented the Caesars holding company, its operating subsidiary, and the holding company's private equity sponsor. As the report notes, it is not unusual for a law firm to simultaneously represent at a parent and a sub or a sponsor and a portfolio company. But the examiner's report argues that things change in one of the entities is insolvent because then the real party interest in that firm are the creditors, not the shareholders, and that means there is a real conflict of interest between the insolvent (or potentially insolvent) sub and the holding company (and private equity sponsor).
Although the examiner's report ultimately concludes that there's probably not much basis for finding liability against Paul Weiss (which might not have even know of the insolvency), something jumped out at me: the lurking conflict between Delaware corporate law and NY Rules of Professional Conduct.
Here's the problem. While the examiner's report is correct in describing creditors as the real party in interest in an insolvent company, that's not how Delaware corporate law treats things. In North American Catholic Educational Programming Foundation, Inc. v. Gheewala, the Delaware Supreme Court made very clear that even if a firm is insolvent, the duties of the directors still run to the firm and its shareholders, not to the creditors. (Were it otherwise, we'd have a lot of interesting litigation every time a firm got anywhere near insolvent, and risk averse directors would be well-counseled to file for bankruptcy the second insolvency appeared on the horizon.)
But let's assume that the examiner's report is correct that for the purposes of New York Rules of Professional Conduct there would be a conflict of interest such that the attorneys could not simultaneously represent both the parent and the insolvent sub. Presumably whatever attorneys would represent the sub would have to look to the interests of the creditors of the sub under NYRPC. How on earth would that work, when the sub's directors are responsible to the shareholder (i.e., the parent) under Delaware law? If the examiner's report's interpretation of NY RPC is correct, then I don't see how any NY barred lawyer can represent a Delaware corporation that might be insolvent. (Of course, the solution to all of this might be simply be that there is a violation of NY RPC, but it isn't really actionable by any body, and no bar committee is going to look at this too closely.)