Can a law firm that is owed fees serve on the creditors' committee in the bankruptcy of a former client?

Plain-English summary

The Committee was asked whether a law firm may serve on a creditors' committee formed in a former client's Chapter XI bankruptcy. The firm was one of the largest creditors because of unpaid fees, and during the prior representation it had gained knowledge of or access to the client's financial affairs. The opinion concluded the firm should not serve on the committee under these circumstances unless it obtains an informed and effective consent from the former client, because service creates a fiduciary duty of committee members toward the class of creditors, and the firm may not be able to discharge that duty without violating the former client's confidences.

The opinion applied DR 4-101, which bars revealing or using a former client's confidences and secrets but allows disclosure necessary to collect a fee. It concluded the firm may pursue its claims in bankruptcy and reveal matters necessary to protect those claims, but DR 4-101 would still restrain the firm from revealing other matters learned during the representation, including using a confidence to the client's disadvantage or for the advantage of a third person. Even limited participation on the committee, the opinion noted, may itself breach the fiduciary duty owed to the class of creditors.

The opinion assumed no attorney-client relationship would exist between the firm and the committee members, while noting that such a relationship is possible under the bankruptcy laws. It analogized the situation to representing a third party against a former client, where there is a substantial possibility that knowledge gained during the representation is barred from disclosure by DR 4-101 and Alaska law, citing Aleut Corporation v. McGarvey and Burrell v. Disciplinary Board. The opinion's endnote added that a firm may serve on a creditors' committee without the debtor's consent if no present or former attorney-client relationship existed between the firm and the debtor.

Currency note

This opinion was issued in 1986, before the Alaska Bar Association's adoption of the 2009 revisions to the Alaska Rules of Professional Conduct (and before Alaska adopted the Rules of Professional Conduct at all; it applies the former Code of Professional Responsibility). Subsequent rule amendments or later opinions may have changed the analysis, and the cited bankruptcy provisions may have been amended. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm owed fees join the creditors' committee in a former client's bankruptcy?

A: The opinion concluded the firm should not serve without the former client's informed and effective consent, because the committee role creates a fiduciary duty to all creditors that the firm may be unable to meet without revealing the former client's confidences.

Q: Can the firm still collect the fees it is owed?

A: Yes. The opinion concluded the firm may pursue its claims in bankruptcy and reveal matters necessary to protect those claims under the fee-collection exception to DR 4-101.

Q: What if the firm never represented the debtor?

A: The opinion's endnote stated a firm may serve on a creditors' committee without the debtor's consent if no present or former attorney-client relationship existed between the firm and the debtor.

Background and rules framework

The opinion applied DR 4-101 of the former Alaska Code of Professional Responsibility, the confidences-and-secrets rule analogous to Model Rules 1.6 and 1.9, including its prohibitions on revealing or using a client's confidences and the exception for collecting a fee. It read those duties against the fiduciary obligations a creditors'-committee member owes the class of creditors under the bankruptcy laws.

Citations and references

Rules of Professional Conduct (former Code; cf. Model Rules):

• DR 4-101 (preservation and use of confidences and secrets; fee-collection exception) (cf. Model Rules 1.6, 1.9)

Cases:

• Aleut Corporation v. McGarvey, 573 P.2d 473 (Alaska 1978), former-client disqualification
• Burrell v. Disciplinary Board of Alaska Bar Association, 702 P.2d 240 (Alaska 1985), duties to a former client
• In re Christian Life Center, 16 B.R. 35 (Bankr. N.D. Cal. 1981), fiduciary duties of creditors'-committee members

Statutes:

• 11 U.S.C. § 1103(a) (employment of attorneys by a creditors' committee)

See also

• AK Bar Ethics Op. 2000-02: Confidential Settlements
• Alaska Ethics Op. 95-2: Former Government Lawyer Conflicts

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/86-2.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Ethics Opinion No. 86-2
Service of an Attorney or Firm on a Creditor's Committee Formed Under a
Petition in Bankruptcy Filed by a Former Client.
The Committee has been asked whether a law firm may serve on a
creditor's committee formed as a result of a petition for relief filed by a former
client under Chapter XI of the Bankruptcy Act. The firm is one of the largest
creditors due to fees owed by the former client; during the past representation
of the client, the firm gained knowledge or had access to the client's financial
affairs.
The Committee has concluded that a law firm should not serve on a
creditor's committee under these circumstances, unless an informed and
effective consent has been obtained from the former client. (endnote 1) Service
on a creditor's committee creates a fiduciary duty of the committee members
toward the class of creditors represented by the committee; the law firm may
not be able to discharge this duty without violating confidences of the former
client.
DR 4-101, Code of Professional Responsibility, provides an exception to the
requirement that an attorney maintain confidences of a former client where
necessary to collect a fee. DR 4-101 provides in part.
(B) Except when permitted under DR 4-101(C) and (D), a lawyer shall not knowingly
during or after termination of the professional relationship to his client:
(1) Reveal a confidence or secret of his client.
(2) Use a confidence or secret of his client to the disadvantage of the client.
(3) Use a confidence or secret of his client for the advantage of himself or of a third
person, unless the client consents after full disclosure.
(C) A lawyer may reveal:
(1) Confidences or secrets with the consent of the client or clients affected, but only after
a full disclosure to them.
(2) Confidences or secrets when permitted under Disciplinary Rules or required by law or
court order.
(3) The intention of his client to commit a crime and the information necessary to prevent
the crime.
(4) Confidences or secrets necessary to establish or collect his fee or to defend himself or
his employees or associates against an accusation of wrongful conduct.
1

(D) A lawyer shall exercise reasonable care to prevent his employees, associates, and
others whose services are utilized by him from disclosing or using confidences or secrets
of a client, except that a lawyer may reveal the information allowed by DR 4-101(C)
through an employee. [Emphasis supplied.]
The Committee believes that the firm may therefore pursue its claims in
bankruptcy, and may reveal matters necessary to achieve protection of those
claims. However, DR 4-101 would still restrain the firm from revealing matters
learned during the course of representation of the former client to the creditor's
committee, if those matters were not required to be revealed to protect the
firm's claims and would violate DR 4-101(B)(2) or (3). Such limited participation
on the creditor's committee may itself be a breach of fiduciary duty owed by the
firm to the class of creditors represented by the creditor's committee. [See Re
Christian Life Center, etc. (1981, BC ND Cal) 16 BR 35 concerning the fiduciary
obligations of the members of creditor's committee.]
Under the facts presented, the Committee has assumed that no professional
relationship would exist between the firm and the members of the creditor's
committee, although such relationship is possible under the bankruptcy laws.
See 11 U.S.C.S. Sec. 1103(a). This situation would be similar to that involving
representation of a third party against a former client, where there is a
substantial possibility that knowledge gained during the course of that
representation is clearly prohibited from disclosure by DR 4-101 and Alaska
law. See Aleut Corporation v. McGarvey, 573 P.2d 473 (Alaska 1978) and Burrell
v. Disciplinary Board of Alaska Bar Association, 702 P.2d 240 (Alaska 1985).
Adopted by the Alaska Bar Association Ethics Committee on March 11, 1986.
Approved by the Board of Governors on March 21, 1986.
Endnotes

1: Of course, a law firm may serve on a creditor's committee without debtor

consent if no present or former attorney-client relationship existed between the
firm and the debtor.

2