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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Third Circuit Rejects Side-Switching Disqualification Claim

By Michael L. Cook
July 01, 2022

The Third Circuit recently affirmed the bankruptcy court's approved retention of the debtor's counsel ("S") when that "law firm dropped an existing client to avoid conflicts that would prevent it from taking on a more lucrative client [i.e., the debtor]." In re Boy Scouts of America, 2022 WL 1634643, *7 (3d Cir. May 24, 2022) (BSA). According to the court, there were "not enough facts to put [the so-called "hot potato" doctrine] into play" and disqualify S under the Rules of Professional Conduct. Id. Moreover, because S's representation of the debtor "did not prejudice [the objecting former client], but disqualifying [S] would have been a significant detriment to [the debtor], it was well within the [bankruptcy] court's discretion to determine that the drastic remedy of disqualification was unnecessary." Id. Particular facts of the case, highlighted by the court, supported its finding that there was "nowhere close to an abuse of discretion" by the bankruptcy court's applying Bankruptcy Code (Code) §327(a) to approve S's retention.

Relevance

Conflicts of interest among clients are a chronic problem for law firms with many clients. How law firms address the problem — and they must — is what the BSA decision shows. The decision also shows the problems law firms have in balancing their ethical obligations against the desire for more business. In BSA, S was held to have acted properly, but one client still felt "jilted," if not betrayed. Id. at *1.

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