a sampling of hot-button ethics issues mark b ...the debtors in the phar mor chapter 11 cases the...

A SAMPLING OF HOT-BUTTON ETHICS ISSUES

Speakers: MARK B. JOACHIM Bracewell & Giuliani

1177 Avenue of the Americas New York, New York 10036

(212) 508-6155 [email protected]

NANCY B. RAPOPORT

Gordon Silver Professor of Law William S. Boyd School of Law University of Nevada, Las Vegas

P.O. Box 451003 4505 S. Maryland Parkway Las Vegas, NV 89154-1003 [email protected]

Author:

NANCY B. RAPOPORT

State Bar of Texas 27th ANNUAL ADVANCED

BUSINESS BANKRUPTCY COURSE October 1-2, 2009

Houston

CHAPTER 20

Mark B. Joachim Partner New York T: 212.508.6155 F: 212.938.3855 E: [email protected]

Experience Mark Joachim regularly represents lenders (as well as creditors), official committees and ad hoc groups of creditors in connection with bankruptcy proceedings and out-of-court restructurings. His multifaceted experience also includes complex "pre-packaged" and pre-negotiated reorganizations, the purchase and sale of distressed businesses, and the financing of such transactions. In addition, he has extensive experience advising a variety of financial institutions, including asset-based lenders, investment banks, commercial banks, funds, buy-out firms, and other parties in structuring and implementing complex corporate and financing transactions.

Representative Matters The term loan lender in multi-million dollar credit agreement in connection with Vitality Foodservice Holding Corp.

Agent and lender in multi-million dollar credit agreement in connection with Invision, Inc.

Ad hoc committee of bondholders in the restructuring and exit financing of a leading Canadian-based international forest products company.

The second lien lenders in international insolvency proceedings for the world's largest independent designer and manufacturer of driver control systems, Dura Automotive

Counsel to the second lien lenders in international insolvency proceedings for a leading home builder and financial services company, Technical Olympic

Wells Fargo Bank, N.A. in connection with the Key3 Media Group chapter 11 cases

The debtors in the Phar Mor chapter 11 cases

The official committee of unsecured creditors of Harvard Industries, Inc. and International Wireless Communications Holdings, Inc.

The unofficial committee of Sun Healthcare's bondholders

The unofficial committee of Sam Houston Race Park's bondholders

The DIP lenders to NorthWestern Corporation, Brothers Gourmet Coffees, Inc. and Wilcox & Gibbs, Inc.

The exit lenders to Safety-Kleen Systems, Inc.

Education J.D., with distinction, 1992 B.A., State University of New York at Stony Brook, 1989

Nancy B. Rapoport is the Gordon Silver Professor at the William S. Boyd School of Law, University of Nevada, Las Vegas. After receiving her B.A., summa cum laude, from Rice University in 1982 and her J.D. from Stanford Law School in 1985, she clerked for the Honorable Joseph T. Sneed on the United States Court of Appeals for the Ninth Circuit and then practiced law (primarily bankruptcy law) with Morrison & Foerster in San Francisco from 1986-1991. She started her academic career at The* Ohio State University College of Law in 1991, and she moved from Assistant Professor to Associate Professor to Associate Dean for Student Affairs and Professor in 1998 (just as she left Ohio State to become Dean and Professor of Law at the University of Nebraska College of Law). She served as Dean of the University of Nebraska College of Law from 1998-2000. She then served as Dean and Professor of Law at the University of Houston Law Center from July 2000-May 2006 and as Professor of Law from June 2006-June 2007, when she left to join the faculty at Boyd. Her specialties are bankruptcy ethics, ethics in governance, and the depiction of lawyers in popular culture. She has taught Contracts, Sales (Article 2), Bankruptcy, Chapter 11 Reorganization, Legal Writing, Contract Drafting, and Professional Responsibility. Among her published works is ENRON: CORPORATE FIASCOS AND THEIR IMPLICATIONS (Foundation Press 2004) (co-edited with Professor Bala G. Dharan of Rice University). The second edition, ENRON AND OTHER CORPORATE FIASCOS: THE CORPORATE SCANDAL READER (Nancy B. Rapoport, Jeffrey D. Van Niel & Bala G. Dharan, eds.; Foundation Press 2d ed. 2009), addresses the question of why we never seem to learn from prior scandals. She is admitted to the bars of the states of California, Ohio, Nebraska, Texas, and Nevada and of the United States Supreme Court. In 2001, she was elected to membership in the American Law Institute, and in 2002, she received a Distinguished Alumna Award from Rice University. She is a Fellow of the American Bar Foundation and a Fellow of the American College of Bankruptcy. In 2009, the Association of Media and Entertainment Counsel presented her with the Public Service Counsel Award at the 4th Annual Counsel of the Year Awards. She has also appeared in the Academy Award®-nominated movie, Enron: The Smartest Guys in the Room (Magnolia Pictures 2005) (as herself). Although the movie garnered her a listing in www.imdb.com, she still hasn’t been able to join SAG. In her spare time, she competes, pro-am, in international Latin and Standard dance with her teacher, Sergei Shapoval. The best way to reach her is to call her on her cell phone.

Nancy B. Rapoport Gordon Silver Professor of Law William S. Boyd School of Law

University of Nevada, Las Vegas P.O. Box 451003

4505 S. Maryland Parkway Las Vegas, NV 89154-1003

[email protected](c) 713-202-1881

SSRN author page: http://ssrn.com/author=260022IMDB.com page: http://imdb.com/name/nm1904564/

Blog: http://nancyrapoport.blogspot.com

* “The” really is capitalized as part of The Ohio State University’s official name.

A Sampling of Hot-Button Ethics Issues Chapter 20

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TABLE OF CONTENTS

CONFLICTS OF INTEREST IN CHAPTER 11 CASES ARE TRICKY .................................................................... 1

SOME CONFLICTS SEEM OBVIOUS ....................................................................................................................... 1

THAT’S WHY THE “CONFLICTS COUNSEL” CONCEPT AROSE ....................................................................... 3

NOW LET’S MAKE THE ETHICS ISSUES EVEN MORE COMPLICATED .......................................................... 3

THE WORLD OF NASTY SURPRISES ...................................................................................................................... 3

CREDITORS’ COMMITTEES & AD HOC COMMITTEES: ADDITIONAL ETHICS ISSUES.............................. 4

WHAT ARE THE REAL ISSUES HERE? ................................................................................................................... 5

A Sampling of Hot-Button Ethics Issues

University of Nevada, Las Vegas, William S. Boyd School of Law | (702) 895-3671 | www.law.unlv.edu

Nancy B. RapoportGordon Silver Professor of LawWilliam S. Boyd School of Law

University of Nevada, Las Vegashttp://www.law.unlv.edu/faculty_nancyRapoport.html

http://nancyrapoport.blogspot.com/

© Nancy B. Rapoport 2009. All rights reserved.

Conflicts of interest in chapter 11 cases are tricky.

Bankruptcy cases involve constantly shifting alliances.It’s hard to tell, at the beginning of a case, who is “potentially adverse” to whom—it’ll depend on the issue.

Some conflicts seem obvious.

Debtor Creditors


1

But you can find creditors engaging in internecine warfare.

Unsecured creditors

Secured creditor with “perfection

problems”

And scarce funds can make for surprising bedfellows.

Debtor & Secured creditorunsecured creditors

Secured creditor negotiating cash

collateral stipulation

(Pack of wolves)

Speaking of bedfellows, consumer-side bankruptcy cases can have their own conflicts issues.

H & W whoH & W going through a bk

together

H & W who decide to

divorce during the bk case


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That’s why the “conflicts counsel” concept arose.

For some articles on the subject: you might start with Nancy B. Rapoport, The Intractable Problem of Bankruptcy Ethics: Square Peg, Round Hole,30 HOFSTRA L. REV. 977 (2002) (ethics symposium).

Now let’s make the ethics issues even more complicated.

Whose ethics rules govern?The court where the case is filed?• State rules? (After all, we’re in

FEDERAL court here!)FEDERAL court here!)The state rules in which the lawyer is admitted?• What if you’re admitted in more than

one jurisdiction?

The world of nasty surprises (just 2 examples—there are many more):

Representing a creditor and a third-party purchaser of assets (in some of which the creditor has a security interest).Doing a poor conflicts check at the beginning of the case.

Conflicts checks aren’t always best left to first-year associates.Disclose, disclose, disclose. (Do a search on SONICBlue sometime.)Continuing duty to update any necessary information with the Court.


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Creditors’ committees & ad hoc committees: additional ethics issues

Zen koan: can you have a client before you have a client?

Before the committee is appointed, who’s the “client”?How can you solicit a client who doesn’t yet exist?

And yet solicitation happens all the time WhatAnd yet, solicitation happens all the time. What solicitation is permissible?

Does the answer depend on whose rules govern?• Same issue as with conflicts—is it the court in which the case

is filed, your home state ethics rules, or some mix? • What if some of the committee constituents are foreign?


Model Rule of Professional Conduct 7.3 governs direct contact with prospective clients.Subsection (a) prohibits “in-person, live telephone or real-time electronic contact” solicitation “when a significant motive for the lawyer's doing so is the lawyer's

i i ” l th t ti li t i lpecuniary gain,” unless that prospective client is also a lawyer, has some sort of significant prior relationship with the lawyer doing the contacting (e.g., family, friend, or prior client). The idea is that lawyers can unduly influence people, so direct solicitation w/o a prior relationship is unfair.


Subsection (b) prohibits a lawyer from using “written, recorded or electronic communication or by in-person, telephone or real-time electronic contact” even when not barred by subsection (a) if the prospective client has told the lawyer toif the prospective client has told the lawyer to leave her alone, or if the solicitation involves duress or harassment (e.g., The Rainmaker’s scene about soliciting accident victims in a hospital).


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Subsection (c) regulates what advertising material should look like. Subsection (d) covers participation in “a prepaid or group legal service plan operated by an organization not owned or directed by the lawyer that uses in-person or t l h t t t li it b hitelephone contact to solicit memberships or subscriptions for the plan from persons who are not known to need legal services in a particular matter covered by the plan.”

But keep watching Zelotes v. Churn.

What are the real issues here?

On the one hand, every committee is entitled to get the lawyer of its choice.

How is a committee (typically composed of non-lawyers) to find good lawyers w/o “auditioning” them or getting some material from those lawyers?g g y

On the other hand, how do we keep lawyers wanting the lucrative role of committee counsel from unfairly manipulating the process?

“Proxies.”Shutting out the competition.


Who can enforce violations of rules relating to solicitation?

Certainly, any state court licensing an attorney can enforce its own rules.Reciprocal discipline among states.Reciprocal discipline among states.Should there be more clearly defined federal rules that set forth the difference between permissible and impermissible solicitation behavior?Should there be more clearly defined federal rules for enforcement of bad solicitation practices?


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