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Duties of Counsel for a Debtor-in-Possession

posted by Lois R. Lupica & Nancy Rapoport

What are the duties of the lawyer represent the debtor-in-possession? We know the DIP has fiduciary duties to the estate. Does this mean that the DIP’s attorney is actually counsel for the “estate”? This is not a question on a law school exam, but a very real and vexing practical issue that arises in situations when the DIP acts in ways that appear to compromise its fiduciary duties to the estate. Some courts facing this issue have relied on the designation of the lawyer as “counsel for the estate” as a way of expressing their frustration with cases in which counsel for DIPs have ratified the bad decisions of the individuals speaking for the DIPs. Although “counsel for the estate” is a convenient concept, there remains the need for more clarity in terms of describing specifics of the DIP’s fiduciary duties and the particular duties of DIP counsel. This is the task the Ethics Task Force took on in drafting its proposal Report on Duties of Counsel for a DIP as Fiduciary and Responsibilities to the Estate.

This Report details and discusses the multi-party relationships and duties—lawyer to client (the DIP), DIP to estate, and lawyer to court -- that arise in reorganization cases. The amorphous nature of the “estate” is a further complicating factor. The DIP is more of a quasi-trustee than it is the pure equivalent of a state law trustee, having certain obligations that rise to the level of fiduciary duties, as well as obligations that relate to its status as a debtor in bankruptcy. Representing the DIP/debtor client entails counseling the “debtor part” of the client on exercising its rights and responsibilities as defined under the Bankruptcy Code and advising the “DIP part” of the client requires an understanding of and facilitating the exercise of the DIP’s fiduciary duties of loyalty, care, and impartiality. It also requires the lawyer’s refusal to participate in the client’s proposed violation of its statutory and fiduciary duties.

We even included some visuals to show the differences in duties owed to the DIP as the fiduciary of the estate and the debtor (which is not a fiduciary).

Comments

This seems like it is most acute in individual chapter 11 cases, where clients have the most trouble wrapping their mind around "fiduciary of the estate" and "I'm not really your attorney." I have wondered whether it would make sense for the debtor's attorneys in individual chapter 11 cases to actually move for the appointment of a trustee at the outset to make the case more manageable and to increase the odds of a case actually being completed.

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