When a corporate client files Chapter 7 bankruptcy, who is the lawyer's client, what may the lawyer tell the trustee, and may the lawyer act over the sole shareholder's objection?

Plain-English summary

A lawyer represented a corporation in a civil suit against another attorney, taking directions from the corporation's sole shareholder and president. While the suit was pending, the corporation filed Chapter 7, which created a bankruptcy estate and vested the cause of action in the trustee. The shareholder first wanted the trustee to pursue the suit, then wanted it dismissed; the trustee wanted the lawyer to pursue it. The opinion addressed who the lawyer's client was, what the lawyer could tell the trustee, whether the lawyer could act over the shareholder's objection, the lawyer's obligations at the shareholder's deposition, and the duty to report misconduct discovered in discovery.

The opinion concluded that, technically, the lawyer had no client until appointed by the bankruptcy court to represent the estate and the trustee in the civil action; once that occurs, the clients are the bankruptcy estate and the trustee acting in his official capacity, and all decisions about the representation are the trustee's (comparing Rule 1.13(a) and RPC 137). Before any appointment, because the trustee is the fiduciary of the corporation's assets, including its civil claim, the trustee is entitled to all information about the claim, and the lawyer may disclose to the trustee all confidential information relating to the corporation's representation in the action (the opinion citing Rule 1.5(d)(1) and (2) and comparing RPC 195).

On the shareholder's objection, the opinion concluded the decision to pursue the claim lies within the trustee's discretion, and the shareholder has no authority over the trustee. If the lawyer represented only the corporation and never the shareholder individually, the lawyer owes the shareholder no duty of loyalty and may follow the trustee's directions. But if the lawyer also represented the shareholder individually as to the claim, or led the shareholder reasonably to believe so, pursuing the suit over the shareholder's objection could create a former-client conflict under Rule 1.9(a), barring the representation absent the shareholder's consent. The same distinction governs the lawyer's obligations at the shareholder's deposition. Finally, on reporting, Rule 8.3(a) requires a lawyer who knows another lawyer committed a violation raising a substantial question as to honesty, trustworthiness, or fitness to inform the State Bar or the court, but Rule 8.3(c) does not require disclosure of confidential client information; so the lawyer should report the other attorney's misconduct if the knowledge is not confidential, or if confidential and the trustee does not object to disclosure.

Currency note

This opinion was issued in 1998, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rules under the numbering then in effect (Rule 1.13(a), Rule 1.9(a), Rule 1.6, Rule 8.3(a), (c)). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific requirement mentioned here.

Common questions

Q: After a corporate client files Chapter 7, who is the lawyer's client?

A: The opinion concluded that once the lawyer is appointed by the bankruptcy court, the clients are the bankruptcy estate and the trustee in his official capacity, and the trustee makes all decisions about the representation (comparing Rule 1.13(a)).

Q: Can the lawyer share the corporation's confidential information with the trustee?

A: Yes. The opinion concluded the trustee, as fiduciary of the corporation's assets including its civil claim, is entitled to all information about the claim, and the lawyer may disclose all confidential information relating to that representation.

Q: Can the lawyer pursue the claim over the sole shareholder's objection?

A: The opinion concluded yes if the lawyer never represented the shareholder individually, because the decision is the trustee's and the shareholder has no authority over the trustee; if the lawyer did represent the shareholder individually, Rule 1.9(a) may bar it absent the shareholder's consent.

Q: Must the lawyer report misconduct by the opposing attorney found in discovery?

A: The opinion concluded the lawyer must report it under Rule 8.3(a) if the knowledge is not confidential client information, or if it is confidential and the trustee does not object to disclosure (Rule 8.3(c)).

Background and rules framework

The opinion applied North Carolina Rule 1.13 (organization as client), Rule 1.9 (duties to former clients), Rule 1.6 (confidentiality), and Rule 8.3 (reporting professional misconduct), the analogues to Model Rules 1.13, 1.9, 1.6, and 8.3, to a lawyer's role after the corporate client's Chapter 7 filing vested its civil claim in the trustee. It compared prior opinions RPC 137 and RPC 195 on representation of a decedent's estate and its personal representative.

Citations and references

Rules of Professional Conduct:

• MR 1.13 (organization as client) / NC Rule 1.13(a)
• MR 1.9 (duties to former clients) / NC Rule 1.9(a)
• MR 1.6 (confidentiality) / NC Rule 1.6
• MR 8.3 (reporting professional misconduct) / NC Rule 8.3(a), (c)

Statutes:

• 11 U.S.C. §§ 541, 704 (property of the bankruptcy estate; duties of the trustee)

Other opinions cited:

• RPC 137; RPC 195: representing a decedent's estate and the personal representative in an official capacity

See also

• NC State Bar Op. 98 FEO 20: Disclosing Confidential Information about a Debtor's Property after Discharge in Bankruptcy
• NC State Bar Op. 2000 FEO 11: Disclosure of Confidential Corporate Information by Former In-house Counsel
• NC State Bar Op. 99 FEO 3: Representation of Adverse Interests by Legal Services Lawyers

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/97-formal-ethics-opinion-7/

Original opinion text

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

Inquiry #1:

Attorney A was employed by Corporation B to represent the corporation in a civil suit against Attorney X for breach of contract, breach of fiduciary duty, and double damages. Shareholder D is the sole shareholder and president of Corporation B. Attorney A received his directions regarding the representation of Corporation B from Shareholder D.

While the civil suit was pending, Corporation B filed a Chapter 7 bankruptcy petition. The filing of a bankruptcy petition by Corporation B created a bankruptcy estate to be administered for the benefit of creditors. Under §541 of the United States Bankruptcy Code (11 USC. §541), the bankruptcy estate includes all legal and equitable interests of the debtor in property including the cause of action against Attorney C. Pursuant to §§541 and 704 of the Bankruptcy Code, the trustee is vested with all property of the bankruptcy estate and it is the trustee's duty to collect and reduce the property to money. The trustee has full control over the pending civil action since it is an asset of the estate to be administered.

Initially, Shareholder D advised Attorney A that he wanted the action against Attorney X to be pursued by the trustee in bankruptcy (the "Trustee") and that Shareholder D would disclose confidential information about the civil suit to the Trustee. Subsequently, Shareholder D informed Attorney A that he wanted the Trustee to dismiss the civil action.

The Trustee has asked Attorney A to pursue the civil action against Attorney X as an asset of Corporation B's bankruptcy estate. The Trustee must obtain an order from the bankruptcy court allowing Attorney A to proceed with the representation and authorizing the payment of Attorney A's legal fees. It will be necessary for Attorney A to explain to the bankruptcy court any possible conflict of interest he may have in representing the bankruptcy estate in the action. The Trustee believes that Attorney A will not have a conflict of interest because the interests of Attorney A's former client, the pre-petition corporation, are not in conflict with the interests of the bankruptcy estate. Moreover, shareholders of a bankrupt corporation have no authority over an asset of the corporation's bankruptcy estate.

Counsel for Attorney X has filed a notice to take the deposition of Shareholder D in the civil action. Attorney A wants to clarify his role in the deposition. Attorney A has been unable to contact Shareholder D to discuss the matter.

Upon the filing of a Chapter 7 bankruptcy petition and the appointment of a trustee by the bankruptcy court, is the client of Attorney A the pre-petition corporation or the trustee?

Opinion #1:

Technically, Attorney A has no client until he is appointed by the Bankruptcy Court to represent Corporation B's bankruptcy estate and the Trustee in the civil action against Attorney X. However, the Trustee, as the fiduciary of the assets of the post-petition corporation, has the authority to make decisions about the assets of the bankrupt corporation including the civil action against Attorney X. If Attorney A's representation in the civil action continues, Attorney A's clients will be the bankruptcy estate and the Trustee acting in his official capacity. All decisions about the representation will be made by the Trustee. Compare Rule 1.13(a) ("A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.") and RPC 137 ("[i]n accepting employment in regard to a [decedent's] estate, an attorney undertakes to represent the personal representative in his or her official capacity and the estate as an entity").

Inquiry #2:

During the period of time between the appointment of the Trustee and a court order appointing an attorney for the bankruptcy estate and the Trustee in the pending civil action against Attorney X, what information is the Trustee entitled to receive concerning the representation of Corporation B in the civil action?

Opinion #2:

Trustee is the fiduciary of the assets of the corporation, including its civil claims, and is entitled to receive all information concerning Corporation B's pending civil claim. Attorney A may disclose to the Trustee all confidential information relating to the representation of the corporation in the civil action. See Rule 1.5(d)(1) and (2); compare RPC 195 (holding that in the representation of a decedent's estate and the personal representative, the lawyer owes the duty of confidentiality to the personal representative acting in his official capacity and to the estate itself).

Inquiry #3:

Shareholder D notified Attorney A that he does not want the Trustee to pursue the lawsuit against Attorney X. May Attorney A represent the bankruptcy estate and the Trustee in the civil action if Shareholder D objects to the pursuit of the lawsuit?

Opinion #3:

The decision to pursue the action against Attorney X is within the discretion of the Trustee in the discharge of his fiduciary duties under the Bankruptcy Code. Shareholder D has no authority over the Trustee. If Attorney A represented only Corporation B and never represented Shareholder D individually, Attorney A does not owe Shareholder D a duty of loyalty. He may, therefore, follow the directions of the Trustee and pursue the claim against Attorney X pursuant to the directions of the Trustee.

If, however, Attorney A represented Shareholder D individually with regard to Shareholder D's interests in the civil action against Attorney X or Attorney A made representations to Shareholder D that led Shareholder D reasonably to assume that Attorney A represented Shareholder D individually in the matter, Attorney A may have a conflict of interest in pursuing the civil action over the objection of Shareholder D. Rule 1.9(a) prohibits a lawyer who has formerly represented a client in a matter from thereafter representing another person in the same matter if the interests of the new client are materially adverse to the interests of the former client unless the former client consents. Although there is nothing in the facts that supports this conclusion, if Shareholder D was himself a client of Attorney A with regard to the action against Attorney X and the pursuit of the lawsuit against Attorney X is now materially adverse to the interests of Shareholder D, Attorney A may not represent the corporation's bankruptcy estate and the Trustee in the civil action unless Shareholder D consents.

Inquiry #4:

If Shareholder D is deposed in the lawsuit, does Attorney A have any obligations to Shareholder D during the deposition?

Opinion #4:

Attorney A has an obligation to Shareholder D only if Attorney A represented Shareholder D in his individual capacity and his representation of Corporation B's bankruptcy estate will be adverse to Shareholder D's interests. If so, he may not represent the bankruptcy estate and the Trustee in the deposition or the lawsuit unless Shareholder D consents to the representation. See opinion #3 above. If, on the other hand, Attorney A never represented Shareholder D in his individual capacity, there is no conflict and Attorney A may appear on behalf of the bankruptcy estate and the Trustee at the deposition.

Inquiry #5:

What obligation does Attorney A have to report his knowledge of misconduct by Attorney X which knowledge was gained during discovery in the civil suit?

Opinion #5:

Rule 8.3(a) of the Revised Rules of Professional Conduct provides:

[a] lawyer having knowledge that another lawyer has committed a violation of the Revised Rules of Professional Conduct that raises a substantial question as to that lawyer's honesty, trustworthiness, or fitness as a lawyer in other respects shall inform the North Carolina State Bar or the court having jurisdiction over the matter.

Subparagraph (c) of the rule states that the rule does not require disclosure of confidential client information.

If Attorney A has reportable knowledge of lawyer misconduct that is not confidential, or, if the knowledge is confidential, the Trustee does not object to its disclosure to the State Bar or the appropriate court, Attorney A should disclose the information to the appropriate body.