Two years after the bankruptcy court approved the debtor’s retainer in scouts over the objection of one of the debtor’s insurers, the United States Court of Appeals for the Third Circuit upheld. In re Boy Scouts of Am., no. 21-2035, 2022 US App. LEXIS 13926 (3rd Cir. May 24, 2022). Although the Court of Appeal determined that the insurer had standing to appeal the recusal, it dismissed the insurer’s request to recuse a lawyer for an alleged breach of the Rules of Professional Conduct. The court found that the potential reimbursement of attorneys’ fees precludes mootness and held that the prudential requirements for appealability in bankruptcy are less stringent in the context of restraining orders. Indeed, the court characterized the use of an attorney as integral to the “integrity of the bankruptcy court process” and recognized that “in the absence of immediate appeals, meaningful consideration of potentially ethical issues serious may never take place”. Identifier. at 9 o’clock. The appellant insurer urged the Court of Appeal to enact a rule that would require bankruptcy courts to take into account the rules of professional conduct applicable to the use of counsel. The Third Circuit declined to do so, concluding that Bankruptcy Code §327 provides the correct test to assess whether debtor’s attorney has an invalidating conflict. His reasoning emphasized that the primary concern should be the lawyer’s ability to effectively represent the debtor in his bankruptcy case.
According to the Third Circuit, in the absence of an “actual conflict” under Section 327, disqualification is discretionary and never automatic because the power to disqualify derives from the court’s “inherent disciplinary power over attorneys appearing before it. “. Identifier. at 15. The decision highlighted as relevant factors the ability to retain a faithful attorney of one’s choice, the ability of attorneys to practice without undue restriction, the prevention of the use of disqualification as a litigation strategy, and the prevention of unfair prejudice. . It was undisputed that forfeiture would harm the debtor. The Court of Appeal concluded that the bankruptcy court’s refusal to disqualify was “far from being an abuse of power,id. at *19-20, observing that the use of special counsel to handle the debtor’s insurance matters in conjunction with effective screening to ensure that lawyers working for the debtor do not receive any confidential information or privilege from attorneys who have worked for the insurer strongly supported the bankruptcy court’s decision, whether or not the attorney violated ethical rules.