Legal Ethics Opinion #1585
Conflict of Interest--Fiduciary Relationship: Trustee or Former
Trustee-in-Bankruptcy Bringing Actions Against Debtors for
Fraudulent Transfers
You have presented a hypothetical situation in which a Virginia
attorney, a Chapter 7 bankruptcy trustee for Corporation A, also
is the Chapter 7 bankruptcy trustee for individuals X and Y. In
his capacity as trustee for Corporation A, the trustee has an
obligation to locate and preserve assets for the benefit of
creditors.
You indicate that the attorney has learned of the existence of a
scheme by which significant assets of Corporation A were
concealed and fraudulently diverted from the bankruptcy estate of
A, through a series of banking transactions involving X, Y, and
other individuals. You further indicate that action needs to be
taken against X, Y, and others on behalf of Corporation A.
Finally, you advise that no attorney-client relationship exists
between the attorney/trustee and A, X, or Y and it is likely that
the fraudulently transferred assets can be traced to identifiable
property.
You have asked the committee to opine under the facts of the
inquiry:
(1) whether the attorney, acting as trustee for Corporation
A, may commence an action against X and Y and others,
including the bankruptcy estates of X and Y, of which
he is trustee;
(2) whether, if the attorney resigns as trustee for X and
Y, the attorney-trustee, on behalf of Corporation A,
may bring an action against X, Y, and others,
including the bankruptcy estates of X and Y, of which
he formerly was trustee;
(3) whether, if the attorney-trustee discloses the above
circumstances to the court, and the court specifically
authorizes the attorney-trustee to bring the action on
behalf of Corporation A, the court approval otherwise
renders the ethical issue moot; and
(4) whether the attorney must resign as trustee in all
three cases because of the imminent conflict among the
debtors.
The appropriate and controlling Disciplinary Rules related to
your inquiry are DR 5-105(B) which states that a lawyer shall not
continue multiple employment if the exercise of his independent
professional judgment in behalf of a client will be or is likely
to be adversely affected by his representation of another client,
except to the extent permitted under DR 5-105(C) [which provides
for full disclosure and consent by all clients]; and DR 5-l05(D)
which provides that a lawyer who has represented a client in a
matter shall not thereafter represent another person in the same
or substantially related matter if the interest of that person is
adverse in any material respect to the interest of the former
client unless the former client consents after disclosure.
The committee responds to your inquiries relative to the facts
presented as follows:
(l) The committee has previously opined that if an attorney,
acting in a fiduciary capacity, violates his or her duty in
a manner that would justify disciplinary action had the
relationship been that of attorney-client, the attorney may
be properly disciplined pursuant to the Code of Professional
Responsibility. See LEOs #1301, #1325, #1335, #1442,
#1449, #1487.
The committee is of the opinion that had the attorney been
representing Corporation A and Individuals X and Y, it would
have been improper and violative of DR 5-105(B) for the
attorney to commence an action against X and Y for the
benefit of Corporation A. Thus, the attorney, acting as
trustee for Corporation A, may not commence an action
against X and Y and others, including the bankruptcy estates
of X and Y of which he is a trustee.
(2) The committee is of the opinion that it would be improper,
under DR 5-105(D), for the attorney to resign as counsel for
X and Y and bring an action, on behalf of Corporation A,
against them, without full disclosure to, and consent from,
X and Y. Thus, the committee believes it would be improper
for the attorney, as trustee for X and Y, to take such
action on behalf of Corporation A.
(3) The committee believes that court approval of the
attorney/trustee's proposed action would not render the
ethical issue moot. The committee has previously opined
that even if an act is not prohibited by Virginia or federal
law, engaging in such conduct may still be prohibited under
the Code of Professional Responsibility. See LEOs #1217,
#1324, #1448; Gunter v. Virginia State Bar, 238 Va. 6l7
(l989). Additionally, the Disciplinary Rules are mandatory
in character and represent the minimum level of conduct
below which no lawyer can fall without being subject to
disciplinary action. See Preamble to the Virginia Code of
Professional Responsibility. Therefore, the court's
authorization does not represent the final determination as
to the ethical issue presented.
(4) The committee believes that the attorney must resign as
trustee in all three cases. The committee is of the view
that in order to act as trustee for Corporation A, it would
be necessary for the attorney to use the information learned
as to X and Y's banking transactions. Since the
attorney/trustee is prohibited from using such information,
the committee opines that the attorney's continued position
as trustee for the Corporation would be compromised. The
committee believes that the attorney/trustee cannot both act
as trustee for Corporation A and protect the confidentiality
afforded X and Y.
Committee Opinion
June 14, 1994
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