By: Juliana Toes
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Relativity Media, LLC,[1] the United States Bankruptcy Court for the Southern District of New York addressed a debtor’s application for an order authorizing the retention of a law firm pursuant to 11 U.S.C. 327(a) There, the debtor-in-possession, Relativity Media, LLC (“Relativity”), filed an application to retain Winston & Strawn LLP (“Winston”) in disputes against Netflix.[2] Netflix objected to the retention application, arguing that Winston’s representation of Relativity presented a conflict of interest because Winston had represented Netflix in an unrelated matter pending in Delaware.[3] According to Winston, Netflix previously agreed to an advance conflict waiver, pursuant to which Netflix waived any conflict of interest disputes that may arise the future.[4] The alleged advance conflict waiver consisted of a prior engagement letter from 2012 and a series of emails between Netflix and Winston in 2017 discussing Winston’s representation of Netflix in a different matter.[5] Notably, in an email sent on December 7, 2017, Netflix asked Winston to send a standard retainer for the new matter, but Winston never did.[6]
After examining the previous engagement letter and emails, the court held that the correspondences were insufficient to create an effective advance conflict waiver because they lacked the specificity needed to bind Netflix in all future matters.[7] Without an effective advance conflict waiver, the court held that Winston would violate its professional duties to Netflix by representing Relativity in the current matter.[8] Accordingly, Relativity was required to find new counsel to handle the Netflix dispute.
Under section 327(a), a debtor-in-possession must receive the court’s approval to retain an attorney who is considered a disinterested person and who does not represent an “interest adverse to the estate[.]”[9] The court will likely disqualify an attorney if another creditor in the action objects and the court subsequently finds there to be an “actual conflict of interest.”[10] The court in In re Granite Partners[11] further elaborated that an adverse interest under section 327(a) includes any interest or relationship that would “‘even faintly color the independence and impartial attitude required by the Code and Bankruptcy Rules.’”[12] However, other courts find that this approach would negate the language of section 327(c) by automatically disqualifying any counsel who has concurrent representation.[13] Therefore, most courts have found that no conflict of interest exists “unless there is an ‘active competition between two interests, in which one interest can only be served at the expense of the other.’” [14] Upon such a showing, a debtor-in-possession’s application for retention pursuant to section 327(a) may be denied.
Under the Model Rules of Professional Conduct 1.6(a), concurrent representation will result in an attorney’s disqualification when a matter is directly adverse to one client’s interests.[15] To avoid violating the duty of loyalty, attorneys have attempted to withdraw representation of a former client to represent a present client in an adverse matter.[16] In response to withdrawal cases, courts established the “hot potato” rule, which provides that counsel cannot avoid a disqualifying conflict based on concurrent representation simply by dropping the less desirable client.[17] In Chemical Bank v. Affiliated FM Insurance Co.,[18] the court discussed attorneys’ duty of undivided loyalty as a driving rationale for the ‘hot potato’ rule. This rule prevents an attorney from dropping a client like a ‘hot potato’ in order to pursue a more lucrative client.[19] However, the notable exception to this rule provides that concurrent representation is permissible so long as there is “informed consent.”[20] Informed consent includes situations where parties enter into binding agreements known as advance conflict waivers, which purport to waive a party’s ability to disqualify an attorney for representing future clients in adverse matters.
The court in In re Relativity Media, LLC ultimately made two determinations. First, the court held that the prior engagement letter and emails between Winston and Netflix were insufficient to constitute an effective conflict waiver because they were not specific enough to bind Netflix in all future matters.[21] Therefore, Netflix had not waived any potential conflict of interests involving Winston.[22] In the absence of an effective conflict waiver, the court next addressed whether Winston could represent Relativity in the current matter against Netflix. In answering this question, the court relied on the default rule that a lawyer cannot sue a current client, even if the matters are entirely unrelated.[23] Therefore, the court’s second determination was that Winston was barred from representing Relativity in the matter against Netflix because it posed a conflict of interest and violated Winston’s professional obligations to Netflix.[24] Additionally, the court noted that Winston could not cure this conflict simply by withdrawing its representation of Netflix in the pending Delaware matter, as that would violate the well-established “hot potato rule.”[25] Accordingly, Relativity’s application was granted on the condition that it retained new counsel to handle the dispute with Netflix.
[1] In re Relativity Media, LLC, Case No. 18-11358, 2018 Bankr. LEXIS 2037 (Bankr. S.D.N.Y. July 6, 2018)
[2] In re Relativity Media, LLC, 2018 Bankr. LEXIS 2037, at *2.
[3] Id. at *3–4.
[4] Id. at *4–5.
[5] Id.
[6] Id.
[7] Id. at *16.
[8] Id. at *18–19.
[9] 11 U.S.C. § 327(a).
[10] 11 U.S.C. § 327(c).
[11] In re Granite Partners, 219 B.R. 22, 23 (Bankr. S.D.N.Y. 1998)
[12] Id. at 33 (quoting In re Roberts, 46 B.R. 815, 828 (Bankr. D.Utah 1985).
[13] 11 U.S.C. §327(c) (concurrent representation does not automatically disqualify counsel unless, upon objection, the court finds there to be a conflict of interest)
[14] In re Relativity Media, LLC, 2018 Bankr. LEXIS 2037, at *8 (quoting In re Empire State Conglomerates Inc., 546 B.R. 306, 315 (Bankr. S.D.N.Y. 2016)).
[15] Chemical Bank v. Affiliated FM Insurance Co., 1994 U.S. Dist. LEXIS 5120, at *11 (S.D.N.Y. Apr. 20, 1994).
[16] See, e.g., id.
[17] See id.
[18] Chemical Bank, 1994 U.S. Dist. LEXIS 5120, at *11
[19] Id. at *39 (quoting Picker Int’l Inc. v. Varian Assoc., Inc., 670 F. Supp. 1363, 1365–66 (N.D. Oh. 1987)).
[20] Model Rules of Prof’l Conduct r. 1.6(a) (Am. Bar Ass’n 2018).
[21] In re Relativity Media, LLC, 2018 Bankr. LEXIS 2037, at *18.
[22] Id. at *19.
[23] Id. at *13.
[24] Id. at *18–19.
[25] Id. at *14 (explaining that the hot potato rule prevents an attorney from remedying a disqualifying conflict of interest by dropping one of the two clients).