It’s Not Easy Being Green: Ethical Pitfalls for Bankruptcy Novices

A thorough discussion of professional ethics for Bankruptcy Attorneys.

1. It’s Not Easy Being Green : Ethical Pitfalls for Bankruptcy Novices Hon. Meredith S. Grabill • U.S. Bankruptcy Court; Eastern District of LA • New Orleans Ashley L. Belleau • Lugenbuhl, Wheaton, Peck, Rankin & Hubbard • New Orleans Benjamin W. Kadden • Lugenbuhl, Wheaton, Peck, Rankin & Hubbard • New Orleans April 20, 2022 | 3:35-4:35 (1 credit; ethics)

2. Agenda 01. Who is your client? 02. Common conflicts for debtor’s counsel . 03. Common conflicts for creditor’s counsel . 04. Common conflicts for committee’s counsel 05. Engagement letters and professional applications 2 Bankruptcy Ethics April 20, 2022

3. I. Who is your client? The start of any ethics inquiry is determining to whom you owe your loyalty. April 20, 2022 Bankruptcy Ethics 3

4. Who is your client? Debtor(s) or Bankruptcy Trustee (e.g., DIP, Ch. 7 Trustee) Equity Holder(s) (e.g., 100% Owner, Minority Shareholder) Unsecured Creditor(s) (e.g., Trade Creditor, promissory note holder) Secured Lender(s) (e.g., DIP Lender, Institutional Lender, Lien Holder) Official (or ad hoc) Committee (e.g., UCC, Ad Hoc Lienholders’ Cmte.) Post-Confirmation Trustee (e.g., Liquidation Trustee) 4 Bankruptcy Ethics April 20, 2022

5. II. Common conflicts for debtor’s counsel 5 Bankruptcy Ethics April 20, 2022

6. Debtors: Representing the Company and its Estate, Not the Principals An attorney serving as bankruptcy counsel to a corporate debtor often faces conflicts that preclude him from effectively representing a debtor’s principals. Conflicts frequently occur where one or more principal is a guarantor of a debt for which the debtor is a primary obligor. Debtor’s counsel should review for potential conflicts, identify these conflicts, and recommend equity holders or controllers obtain conflict counsel where appropriate. 6 Bankruptcy Ethics April 20, 2022

7. Debtors: Plans That Are in the Best interest of the Debtor, Not the Principal Conflicts of interests between bankrupts and their principals often come to the forefront during the formation of a chapter 11 plan. How do you get buy-in from the Debtor’s principals on a plan that is in the best interest of the company or the estate, but not them as individuals? 7 Bankruptcy Ethics April 20, 2022

8. III. Common conflicts for creditor’s counsel 8 Bankruptcy Ethics April 20, 2022

9. Creditors: Conflicts Between and Within Classes Attorneys frequently represent more than one individual creditor in a case. Doing so can make representation more efficient. Unsecured creditors may be happy to spread the cost of having an attorney monitor a fast-developing and complex bankruptcy case across multiple constituents. 9 Bankruptcy Ethics April 20, 2022

10. Creditors: Conflicts Between and Within Classes An obvious conflict for an attorney representing multiple creditors may arise when two or more creditors are separated into different classes and are receiving disparate treatment in a proposed Chapter 11 plan. However, a conflict may even arise where creditors are in the same class. 10 Bankruptcy Ethics April 20, 2022

11. IV. Common conflicts for committee’s counsel 11 Bankruptcy Ethics April 20, 2022

12. Committees: Solicitation and Conflict Checks In a survey of ABI members, of those who attended an organizational committee meeting, the vast majority (84%) reported attending after receiving the invitation of an unsecured creditor. Candidates for committee counsel are rarely completely unconnected to stakeholders in a Chapter 11 case. 12 Bankruptcy Ethics April 20, 2022

13. Committees: Solicitation and Conflict Checks It is critical that attorneys soliciting to become committee counsel conduct a conflicts check prior to being hired. It is not uncommon that counsel hired by a committee reports that the attorney has a conflict only after a fulsome conflicts review. 13 Bankruptcy Ethics April 20, 2022

14. Committees: Solicitation and Conflict Checks Conflicts may be small (e.g., attorney for post-confirmation trust represents or represented a creditor subject to an avoidance claim) or large (e.g., attorney has debtor’s first-priority secured lender as a current client and cannot be adverse). Even common conflicts that can be cured by hiring conflicts counsel should be disclosed before hiring. Often, they can be identified by checking against available documentation (e.g. schedules, SOFA, list of top creditors). 14 Bankruptcy Ethics April 20, 2022

15. Ninety-five percent (95%) of respondents reported performing a conflicts check prior to any official committee or ad hoc committee solicitation. Only four percent (4%) of respondents reported seeking advice from their state bar ethics hotline. – ABI Nat. Ethics Rep. 016 TXCLE-ABB 7.1 Solicitation and Conflict Checks ”

16. Committees: Representing the Class, Not Its Members As mentioned, most attorneys are presented with the opportunity to work for a committee through a creditor (often an existing client) with a claim against the debtor. When an attorney accepts an opportunity to represent a committee, the attorney has an obligation to make creditors understand the attorney’s loyalty is owed to the committee—which is a fiduciary to creditors as a class —and not to any individual member. 16 Bankruptcy Ethics April 20, 2022

17. Committees: Representing the Class, Not Its Members It is important that individual members understand where committee’s counsel’s loyalty is owed because what is good for the class may frequently be bad for an individual credito r. e.g., preference claims—a payment to an individual creditor is unwound so the proceeds can be shared among creditors pro rata , as a class. 17 Bankruptcy Ethics April 20, 2022

18. Committees: Advising the Committee of Fiduciary Duties One of committee’s counsel’s primary obligations is to advise the members as to their fiduciary obligations. Committee members are often new to bankruptcy and may or may not be well versed in the concept fiduciary obligations generally depending on their own individual background and experience. 18 Bankruptcy Ethics April 20, 2022

19. Committees: Confidential Information Committee’s counsel is often given access to information subject to varying levels of confidentiality. Confidential information given to committee’s counsel may be for “attorneys’ eyes only,” restricted to committee members, or restricted to all signatories to a protective order or confidentiality agreement. 19 Bankruptcy Ethics April 20, 2022

20. Segregating Confidential Information Committee members must be advised that they cannot use information restricted to the committee to obtain an advantage for themselves as individual creditors.

21. Committees: What to Do When a Member Acts Out of Bounds Committee members, even well-advised ones, may commit ethical infractions both mundane and severe. As counsel, work to quickly identify potentially unethical or illegal conduct by members. You may wish to seek an ethics advisory opinion from the Louisiana State Bar Association ( 1-800-421-5722 ). 21 Bankruptcy Ethics April 20, 2022

22. Committees: What to Do When a Member Acts Out of Bounds Minor infractions may be remediated by a clarifying instruction from the attorney to the member. Major ethical infractions or possibly illegal activity should be reported to appropriate parties, including the U.S. Trustee and even the court. 22 Bankruptcy Ethics April 20, 2022

23. Committees: Reporting Illegal Member Conduct In re: Neiman Marcus Group LTD LLC , et al., No. 20-32519 (DRJ) (Bankr., S.D. Tx.) Daniel Kamensky, a former bankruptcy attorney and the founder and former manager of New York hedge fund Marble Ridge Capital, joined as a member of the Neiman Marcus’ official committee of unsecured creditors. 23 Bankruptcy Ethics April 20, 2022

24. Committees: Reporting Illegal Member Conduct In re: Neiman Marcus Group LTD LLC , et al., No. 20-32519 (DRJ) (Bankr., S.D. Tx.) Mr. Kamensky negotiated with the committee an offer to provide a cash-out option to unsecured creditors for a class of shares being offered to these creditors as a part of a reorganization plan. When Mr. Kamensky learned of a rival bidder, he pressured this bidder to abandon its higher bid for the assets so that Marble Ridge could obtain those assets for a lower price. 24 Bankruptcy Ethics April 20, 2022

25. Committees: Reporting Illegal Member Conduct In re: Neiman Marcus Group LTD LLC , et al., No. 20-32519 (DRJ) (Bankr., S.D. Tx.) Counsel for the committee was made aware of this conduct by counsel to the rival bidder. Counsel for the committee detailed the circumstances of these events in a letter to the U.S. Trustee, which was ultimately filed in the bankruptcy docket. 25 Bankruptcy Ethics April 20, 2022

26. In re: NEIMAN MARCUS GROUP LTD LLC, et al., 20-32519 Result: Daniel Kamensky was sentenced to six months in federal prison for engaging in fraud and extortion.

27. V. Engagement Letters and Professional Applications 27 Bankruptcy Ethics April 20, 2022

28. Engagement Letters and Professional Applications Many of the disclosures discussed today can be incorporated into an engagement letter. A well-written engagement letter will allow you to clarify the scope of your duties and ethical obligations at the start of your representation . 28 Bankruptcy Ethics April 20, 2022

29. Thank you Hon. Meredith S. Grabill • U.S. Bankruptcy Court; Eastern District of LA • New Orleans Ashley L. Belleau • Lugenbuhl, Wheaton, Peck, Rankin & Hubbard • New Orleans Benjamin W. Kadden • Lugenbuhl, Wheaton, Peck, Rankin & Hubbard • New Orleans April 20, 2022 | 3:35-4:35 (1 credit; ethics) Materials Prepared by Coleman Torrans, Lugenbuhl, Wheaton, Peck, Rankin & Hubbard