This is an issue that comes up fairly often, although normally no objections are made for a Rule 2004 examination. As long as the lawyer is not obstructive, it is usually not worth the additional time and expense of filing an objection. In In re Craig, Ch. 7 Case No. 16-59582, 2017 WL 713572 (Bankr. N.D. Ga. February 21, 2017) (click here for .pdf), Judge Diehl addressed the issue of whether a debtor’s attorney can represent an non-filing spouse in a Rule 2004 exam. The United States Trustee was the party moving for the examination in this case as part of their investigation into possible bad faith or whether an objection to discharge is appropriate. The U.S. Trustee moved for disqualification of the debtor’s counsel after he informed them that he would be representing the debtor’s spouse at the examination, but before the examination took place.
The U.S. Trustee contends that Debtor and his non-filing spouse have divergent and conflicting interests relating to their marital property, and by representing both, [counsel] would be violating conflict of interest ethics rules, warranting disqualification. At the hearing, the U.S. Trustee provided numerous examples of potential conflicts that may arise but failed to allege any actual, current conflicts.
After noting that parties are presumptively entitled to the counsel of their choice, and parties moving for disqualification bear the burden of proving grounds for the extraordinary remedy, Judge Diehl held that the representation of the non-filing spouse in the Rule 2004 exam was not, per se, inappropriate.
First, the U.S. Trustee asserts that if Debtor obtains a discharge, his non-filing spouse will be left as the sole obligor on several debts, and that the impact of a potential future divorce will negatively affect her as the sole obligor on the debts, resulting in a conflict of interest. The U.S. Trustee further argues that the non-filing spouse may have information that will impact a motion to dismiss and objection to discharge that the U.S. Trustee may file, resulting in a conflict of interest. These arguments set forth only potential future conflicts. The U.S. Trustee has failed to provide any evidence of any actual, current conflict that would materially and adversely affect the representation of either party.
In any case, had the U.S. Trustee successfully argued that an actual conflict of interest did exist, Debtor and his non-filing spouse each gave informed consent in writing, after consultation with [counsel], having received in writing reasonable and adequate information about the material risks of and reasonable available alternatives to the representation, and having been given the opportunity to consult with independent counsel as required by Rule 1.7(b). Further, Debtor’s non-filing spouse testified at the hearing that she understands that she has the opportunity to consult and retain other counsel and that she understands that conflicts may arise in the future that would interfere with [counsel] representing both her and her husband. Finally, the U.S. Trustee failed to put forward any evidence that a conflict, had it existed, would not be waivable… In short, a disqualification order from this Court would require that an actual conflict of interest exist that is not waivable.
Judge Diehl’s opinion and reasoning are, as usual, clear and well supported. However, should courts engage in a slightly different analysis in Bankruptcy cases in which the attorneys in question represent debtors? Bankruptcy cases are not like other cases in which the parties are typically on even ground. When a debtor files a Bankruptcy petition, the law is clear that they have a duty to fully cooperate with the Trustee, U.S. Trustee and other parties (see, for example, §521) , and debtors’ lawyers are often viewed as having legal duties to both their client and the Bankruptcy estate and Court. Debtors who voluntarily subject themselves to the Bankruptcy process are not on an even playing field with another party. If a debtor’s counsel is representing, for example, a non-filing spouse who may have received a preferential or fraudulent transfer, is there not an inherent conflict of interest when the debtor’s attorney also represents the spouse who may be subject to an avoidance action? Is this not a violation of the debtor’s and counsel’s duty to fully cooperate with a Trustee in administering the estate? I did not read the pleadings in this case, and do not know if the U.S. Trustee raised this issue. Judge Diehl’s opinion probably suggests that it turns on the distinction between a potential conflict and an actual conflict.
Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation. For more information, click here.