Representation of Trustee and Lender in Bankruptcy
Adopted: October 14, 1981
Inquiry:
B Company executed a note secured by deed of trust to T for S & L, a savings and loan association. T was and is executive vice president of S & L. While the loan was in default, but before any notice of acceleration had been sent to the debtor, B filed a proceeding under Chapter 11 of the Bankruptcy Code. At that point, law firm LMN, as general counsel for S &L. undertook to represent S & L in the bankruptcy proceeding. S & L had lawyer L of law firm LMN substituted as trustee under the deed of trust and then brought an adversary proceeding in the Bankruptcy Court in the name of lawyer L, substituted trustee under the deed of trust, and S & L versus B Company. The sole remedy sought in this adversary proceeding is relief from the automatic stay under the Bankruptcy Act. B Company filed a motion to dismiss for insufficiency of service. No other proceedings have occurred in the adversary proceeding to date, and the debtor has not indicated whether the matter will be contested on the merits. Can law firm LMN ethically represent both the trustee and S & L, the lender, for the purpose of seeking relief from the automatic stay.
Opinion:
No. CPR 166 set out the rule that the trustee/attorney cannot ethically represent either the lender or the borrower in a role of advocacy at any stage of a foreclosure proceeding. The trustee is charged with preserving interests of both lender and borrower and in that sense represents both. To represent either lender or borrower in an adversary capacity would violate his fiduciary duty to the other. Other opinions have extended this principle to related actions in which the substitute trustee or original trustee has the obligation of representing the interests of both lender and borrower. E.g., CPR 264. Thus, lawyer L, as substitute trustee, must represent the interests of both lender and borrower equally in the adversary equally in the adversary proceeding in the Bankruptcy Court. For law firm LMN to represent the lender and the trustee would constitute a violation of the trustee's fiduciary duty to preserve the interests of both lender and borrower or debtor since this is an adversary proceeding in which the interests of lender and debtor may differ.