Opinion
Nos. 75-B-251, 75-B-252, 75-B-253, 75-B-254
May 8, 1980
Former Bankruptcy Act — Removal of Trustee — Conflict of Interest — Material Connections
An attorney being considered for appointment as attorney for a receiver, trustee or debtor-in-possession has a fiduciary obligation to disclose all "connections" with the debtor and with creditors or other parties in interest, including their respective attorneys. Thus, since neither the trustee nor his co-counsel failed to disclose their "material associations" with the debtors and creditors in this proceeding, the movants' motion to remove these parties was denied despite the trustee's and his co-counsel's actions on behalf of railroads and airlines which presented a potential conflict of interest. See Rule 221 at ¶ 20,071 and Rule 215 at ¶ 20,065.
[Digest of Opinion]
In this case, the court reconsidered its earlier decision to deny a motion to remove the trustee and his co-counsel for an alleged conflict of interest in light of a recent Second Circuit decision, Arlan's Department Stores, 79 B 5017, 79 B 5018 (2nd Cir. 1979).
It was alleged with respect to the trustee that his initial appointment was at the suggestion of a partner of a law firm, who was counsel for major airline creditors and further, that the trustee at the time of his appointment, was an officer of an association which acted as a consultant to railroads and dealth in airline and railroad securities as an underwriting and investment banking firm. With regard to the trustee's co-counsel, the movants alleged that they had acted on behalf of railroads and airlines in representing the creditors' committee. The movants thereby maintained that these association or "connections" with railroads and airlines presented conflicts of interest requiring the removal of the trustee and his co-counsel pursuant to Bankruptcy Rule 221 and 215. The court found, however, that such associations and representations were not such as to require the removal of the trustee or his co-counsel. Further, the Arlan's decision, involving an interpretation of General Order 44, now superseded by Rule 215 of the Rules of Bankruptcy Procedure, held that an attorney being considered for appointment as attorney for a receiver, trustee or debtor-in-possession has a fiduciary obligation to disclose all "connections" with the debtor and with creditors or other parties in interest, including their respective attorneys.
Thus, on the record presented, the court found that neither General Order 44 nor the fiduciary duty referred to in Arlan's, required the detailed recitation of each and every association with the debtor or with the creditors. The court said, it was clear from the Arlan's decision that the court was referring to connections which were not "trivia" but "material" . . . Further, in contrast to the Chapter X requirements of disinterestedness on the part of the trustee and his co-counsel, Chapter XI does not preclude the employment of an attorney who has been employed by the bankrupt nor is such an attorney disqualified by reason of representations of a general creditor. Hence the application of the Arlan's principles in view of the fact that trustee and the co-counsel disclosed material connections with the debtors or creditors, did not warrant a change in this court's prior decision.