Legal Memorandum: Debtor's Counsel and Bankruptcy Proceedings

Issue: In a bankruptcy proceeding, when must a court grant a creditor’s challenge to the debtor’s counsel?

           An applicant’s employment as attorney for the debtor-in-possession in a bankruptcy proceeding is subject to the Court’s approval based on a determination that Applicant is a disinterested person who does not hold an interest adverse to the estate.  11 U.S.C. § 327(a) (1979).  A "disinterested person" is defined as a person that:

does not have an interest materially adverse to the interest of the estate or of any class of creditors . . . by reason of any direct or indirect relationship to, connection with, or interest in, the debtor . . . or for any other reason.

11 U.S.C. § 101(14)(E) (Supp. 1992). 

In a chapter 11 case, with a debtor-in-possession, an attorney will not be disqualified solely because he or she has represented the debtor in the past.  11 U.S.C. § 1107(a) (1979).  Thus, an attorney will be disqualified as not disinterested only where an objecting party shows that the attorney holds an interest materially adverse to either the estate or a creditor. 

Past associations are insufficient to disqualify the debtor’s counsel of choice.  Even past representation of parties related to the debtor does not, by itself, destroy the disinterested status of an attorney seeking to represent the debtor-in-possession.  In re […]