Boy Scouts of America v.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 21-2035
In re: BOY SCOUTS OF AMERICA, a/k/a BSA;
DELAWARE BSA, LLC,
Debtors
CENTURY INDEMNITY COMPANY, as successor to CCI
Insurance Company, as successor to Insurance Company of
North America and Indemnity Insurance Company
of North America
Appellants
Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 1-20-cv-00798)
District Judge: Honorable Richard G. Andrews
Argued on March 2, 2022
Before: McKEE, AMBRO, and SMITH, Circuit Judges
(Opinion filed: May 24, 2022)
Jonathan D. Hacker (Argued)
Andrew R. Hellman
O’Melveny & Myers
1625 Eye Street, N.W.
Washington, DC 20006
Tancred V. Schiavoni
O’Melveny & Myers
7 Times Square
Time Square Tower, 33rd Floor
New York, NY 10036
Counsel for Appellants
Derek C. Abbott
Andrew M. Remming
Paige N. Topper
Morris Nichols Arsht & Tunnell
1201 North Market Street, 16th Floor
P. O. Box 1347
Wilmington, DE 19899
Michael C. Andolina
Matthew E. Linder
White & Case
111 South Wacker Drive
Suite 5100
Chicago, IL 33130
2
Jessica C. Lauria
White & Case
1221 Avenue of the Americas
New York, NY 10020
Counsel for Appellee Boy Scouts of
American and Delaware BSA, LLC
Robert N. Hochman (Argued)
James W. Ducayet
Sidley Austin
One South Dearborn Street
Chicago, IL 60603
Counsel for Appellee Sidley Austin
_________
OPINION OF THE COURT
____________
AMBRO, Circuit Judge
Sidley Austin LLP represented insurer affiliates of
Chubb Ltd.—Century Indemnity Co., Westchester Fire
Insurance Co., and Westchester Surplus Lines Insurance Co.
(collectively, “Century”)—in obtaining backup coverage from
reinsurers of Century’s policies. Sidley also represented the
Boy Scouts of America and Delaware BSA, LLC (collectively,
“BSA”) in its restructuring efforts under the Bankruptcy Code
following myriad molesting claims of scouts. Though BSA
made coverage claims under Century’s policies, it did so while
represented by another firm—Haynes and Boone LLP. And
3
Sidley’s reinsurance services for Century were limited to
claims made against the reinsurers (and not BSA).
Century, however, came to feel jilted and claimed a
conflict concerning Sidley’s representation of it and BSA. It
objected when Sidley filed a retention request in BSA’s
bankruptcy case. Century’s objection only concerned the
ability of Sidley to represent BSA, and the Bankruptcy Court
determined that Sidley could do so effectively, thus approving
its retention. The District Court affirmed, and now Century
appeals to us. We agree with those Courts and hence affirm
Sidley’s retention as bankruptcy counsel to BSA.
I. BACKGROUND
Century issued insurance to BSA, and those insurance
policies are now assets of the BSA estate. To help cover its
obligations to BSA in the event of claims, Century purchased
reinsurance—think of it as insurance for insurance
companies—and, after BSA made claims related to sexual-
abuse litigation, Century sought to collect on those policies.
On October 5, 2018, Century hired Sidley’s Insurance and
Financial Services Group to represent it in ensuing reinsurance
disputes. That representation did not extend to the underlying
direct insurance issued by Century to BSA. It (BSA) was not
a party to the reinsurance disputes, and the matters did not
pertain to whether Century would pay BSA under the direct
insurance contracts.
At roughly the same time, starting on September 26,
2018, BSA retained Sidley to explore restructuring options.
The engagement letter for Sidley specified that it would not
“advis[e] [BSA] on insurance coverage issues.” J.A. at 1199.
4
BSA had already retained, without objection, Haynes and
Boone to serve as insurance counsel. Sidley filed BSA’s
bankruptcy petition on February 18, 2020, and subsequently
filed a retention application on March 17. 1 Century objected.
By this time the attorney-client relationship between
Century and Sidley had unraveled. Century appears to have
first learned that Sidley was representing BSA when The Wall
Street Journal published an article on December 13, 2018,
identifying Sidley as BSA’s counsel. But Century did not
object—at least formally—to Sidley’s representation of BSA
until the autumn of 2019. In the interim, BSA engaged in
substantive discussions with its insurers, including Century.
While Haynes and Boone was the sole insurance counsel,
Sidley attorneys were present at some meetings. Century did
not object at the time. But in late October 2019, Century told
Sidley that its representation of BSA created a conflict. On
November 3, Century’s counsel objected to a mediation related
to BSA’s restructuring because of Sidley’s presence. Sidley
responded the next day by putting a formal ethics screen into
place between its restructuring team and its reinsurance team.
Sidley and Century could not reach an agreement. The
former continued to maintain there was no conflict, but on
January 3, 2020, Century sent a letter explaining that it could
not provide a conflict waiver for Sidley to represent BSA or
1
There is a tentative settlement proposal between BSA and
Century. The proposal specifically excludes Century’s claims
against Sidley, and it is included in the proposed reorganization
plan still pending before the Bankruptcy Court. See generally
In re Boy Scouts of America, No. 20-10343-LSS (Bankr. D.
Del. filed Feb. 18, 2020).
5
consent to Sidley’s withdrawal of Century’s representation.
Indeed, Century never gave Sidley a waiver for any claimed
conflict. In response to Sidley’s suggestion that Century was
using the threat of disqualification as a litigation tactic,
Century asserted that it was “shocking and offensive that
Sidley would suggest that Chubb has an improper motive in
trying to address the conflict issue.” J.A. at 1391. Sidley then
provided written notice to Century on January 16 that it was
withdrawing due to a breakdown in the attorney-client
relationship. The Bankruptcy Court found Sidley finished
withdrawing on either February 20 or 24, 2020.
Fast forward to September 2020, when the Sidley
attorneys working for BSA moved to a new firm, taking with
them BSA as a client. Sidley is thus no longer actively working
on BSA’s bankruptcy. Century is separately pursuing its
grievances about the representation it received from Sidley in
arbitration as provided in their governing retention agreement.
The parties dispute what information Century provided
to Sidley and the significance of it. The Bankruptcy Court
found that Sidley’s representation of Century “could be
‘substantially related’ to at least some aspects of [BSA’s]
bankruptcy case.” J.A. at 38. But it also concluded that while
Sidley may have received confidential information in the
reinsurance matter relevant to BSA’s bankruptcy, no
privileged or confidential information was shared between the
two legal teams at Sidley. Id. at 40.
The Bankruptcy Court, in a well reasoned ruling,
approved Sidley’s retention nunc pro tunc to the February 18
petition date. It concluded that Sidley’s retention did not run
afoul of the pertinent provision in the Bankruptcy Code—
6
§ 327 2—because Sidley’s representation of Century did not
render it unable to represent BSA effectively. The Court then
considered the potentially applicable Rules of Professional
Conduct—Rules 1.7 and 1.9 3—and noted that, even if certain
legal positions taken in the bankruptcy case regarding the
BSA/Century insurance policies “could be harmful to
Century’s efforts to collect on its [re]insurance,” id.,
disqualification was unnecessary because BSA had special
insurance counsel and Sidley had put an ethics screen into
place, id. at 38–40.
Century appealed to the District Court, which affirmed
in a thorough opinion. The Court observed that the relevant
facts were not in dispute. It separately considered § 327(a) and
the Rules of Professional Conduct (though with no decision on
2
Section 327(a) of the Bankruptcy Code (Title 11 of the U.S.
Code) provides that “the trustee, with the court’s approval, may
employ one or more attorneys . . . that do not hold or represent
an interest adverse to the estate, and that are disinterested
persons, to represent or assist the trustee in carrying out the
trustee’s duties under this title.” Section 327(c) adds that “a
person is not disqualified for employment under this section
solely because of such person’s employment by or
representation of a creditor, unless there is objection by another
creditor or the United States trustee, in which case the court
shall disapprove such employment if there is an actual conflict
of interest.”
3
The Delaware Bankruptcy Court has adopted the American
Bar Association’s Model Rules of Professional Conduct. See
Bankr. D. Del. Ct. R. 9010-1(f). Rule 1.7 governs concurrent
conflicts of interest, and Rule 1.9 concerns obligations to
former clients. Each is set out in Section III.C below.
7
the latter). As had the Bankruptcy Court, the District Court
discerned no actual conflict for § 327 purposes because, at the
time of its retention, Sidley held no interest adverse to BSA.
Even assuming a professional rule violation, it held the
Bankruptcy Court exercised its discretion appropriately in
deciding disqualification was even then not a fitting remedy in
this context. By proceeding in this way, the Court held for
Sidley without deciding the merits of the alleged violations of
Rules 1.7 and 1.9.
On appeal to us, Century asserts that § 327 “does not
operate in a vacuum but rather incorporates ethical rules from
state law—here, the Rules of Professional Conduct.”
Century’s Op. Br. at 27. By their declining to determine
whether Sidley violated Rules of Professional Conduct 1.7 and
1.9 and in failing to find an actual conflict under § 327—the
latter requiring per se disqualification—Century alleges the
Bankruptcy Court erred as did the District Court in affirming
that judgment.
II. JURISDICTION AND STANDARD OF REVIEW
This is a core proceeding under 28 U.S.C. § 157(b)(2).
The Bankruptcy Court had jurisdiction under 28 U.S.C. §§ 157and 1334. The District Court had jurisdiction under 28 U.S.C.
§ 158(a)(1) over the appeal of the Bankruptcy Court’s decision,
a final order. See In re Congoleum Corp., 426 F.3d 675, 684–
85 (3d Cir. 2005). We have jurisdiction under 28 U.S.C.
§ 1291.
The District Court acted as an appellate court, and we
review both its factual and legal determinations. Id. at 685.
“[T]o determine whether the District Court erred, we review
8
the [B]ankruptcy [C]ourt’s findings by the standards the
District Court should have employed.” Id. That means we
review for abuse of discretion the decision to approve Sidley’s
application for retention as BSA’s bankruptcy counsel. In re
Marvel Ent. Grp., Inc., 140 F.3d 463, 470 (3d Cir. 1998);
United States v. Miller, 624 F.2d 1198, 1201 (3d Cir. 1980).
“An abuse of discretion exists where the . . . decision rests
upon a clearly erroneous finding of fact, an errant conclusion
of law, or an improper application of law to fact.” Marvel, 140
F.3d at 470 (quoting ACLU v. Black Horse Pike Reg’l Bd. of
Educ., 84 F.3d 1471, 1476 (3d Cir.1996) (en banc)). We give
fresh, or plenary, review to legal determinations and review
factual findings for clear error. Id.III. ANALYSIS
Before turning to the merits, we detour to consider
whether this appeal has become moot.
A. Standing and Mootness
As a threshold issue, does an active case or controversy
continue? If no, we lack authority under Article III of the
Constitution to consider the merits of Century’s appeal. See
Hamilton v. Bromley, 862 F.3d 329, 334–35 (3d Cir. 2017).
When the requirements necessary for standing at the start of a
case disappear, it becomes moot and no longer satisfies Article
III’s case-or-controversy requirement (unless the defendant
voluntarily ceased the challenged conduct in response to
litigation or the injury is likely to recur while evading review).
See Friends of the Earth, Inc. v. Laidlaw Env’t Servs. (TOC),
Inc., 528 U.S. 167, 189–91 (2000).
9
There is an additional prudential (that is, not-
constitutional) requirement in bankruptcy appeals for standing:
it is limited to “persons aggrieved” by an order of the
Bankruptcy Court. See In re Combustion Eng’g, Inc., 391 F.3d
190, 214 (3d Cir. 2004). Potential appellants are “persons
aggrieved” only if they can show that “the order of the
bankruptcy court ‘diminishes their property, increases their
burdens, or impairs their rights.’” Id. (quoting In re PWS
Holding Corp., 228 F.3d 224, 249 (3d Cir. 2000)); see also
PWS Holding, 228 F.3d at 249 (“[O]nly those whose rights or
interests are directly and adversely affected pecuniarily by an
order of the bankruptcy court may bring an appeal.” (internal
quotation marks and citation omitted)).
But when considering appeals from an order approving
the retention of counsel, we need not scrutinize the appellant’s
injury in as much detail. Retention of counsel “implicate[s] the
integrity of the bankruptcy court proceeding as a whole”; hence
it is “extremely important to resolve” those disputes.
Congoleum, 426 F.3d at 685. Absent immediate appeals,
meaningful review of potentially serious ethical issues might
never occur. Id. Congoleum involved whether insurers had
standing to appeal the Bankruptcy Court’s approval of a
retention request. Only the insurers there had reason to
challenge the retention order, and holding they lacked standing
would have impeded self-regulation of the profession. Id. at
686–87. These same considerations apply here. Accordingly,
the Bankruptcy Court’s order affects interests of Century
sufficiently for it to be a “person aggrieved.”
Additionally, even though Sidley no longer has an
active role in the underlying bankruptcy case, the possibility
remains that we could order the disgorgement of its fees. Thus,
10
the outcome of this retention dispute has continuing
implications for the BSA estate and its creditors. For these
reasons, we conclude Century continues to have standing to
bring this appeal and the matter is not moot.
B. Section 327
Section 327(a) of the Bankruptcy Code is the starting
point for retaining a debtor’s professionals. It authorizes the
trustee (and, under § 1107(a) of the Code, a debtor in
possession), with court approval, to employ professionals,
including lawyers, if they (1) “do not hold or represent an
interest adverse to the estate” and are (2) “disinterested
persons.” 11 U.S.C. § 327(a); see also In re BH & P, Inc., 949
F.2d 1300, 1314 (3d Cir. 1991). The latter are defined, in
relevant part, as those who do “not have an interest materially
adverse to the interest of the estate or of any class of creditors
or equity security holders by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor, or
for any other reason.” 11 U.S.C. § 101(14)(C). Save the “any
other reason” catchall, the focus dead ends at the debtor and
especially its estate.
We recognize these two prongs (i.e., not holding an
adverse interest and being disinterested) as formally distinct.
BH & P, 949 F.2d at 1314. That said, in many cases—
including this one—they effectively collapse into a single test.
See 1 Collier on Bankruptcy ¶ 8.03[9] (16th ed. 2022) (noting
that “[t]hese two tests invoke the same consideration of
whether the professional holds or represents an adverse interest
to the interests of the debtor and its estate”); see also BH & P,
949 F.2d at 1314 (“There is, indisputably, some overlap
11
between the [§] 327(a) standard and [§] 101(14)[C] disinterest
requirement.”).
Section 327 conflicts can be sorted into three
subcategories: (1) actual conflicts of interest, (2) potential
conflicts of interest, and (3) appearances of conflict. Marvel,
140 F.3d at 476. The implications of an apparent conflict
depend on which category it fits. Attorneys with actual
conflicts face per se disqualification, but disqualification is at
the court’s discretion for attorneys with potential conflicts. Id.
And a court “may not disqualify an attorney on the appearance
of conflict alone.” Id.
Though not unfettered, bankruptcy courts have
“considerable discretion in evaluating whether professionals
suffer from conflicts.” In re Pillowtex, Inc., 304 F.3d 246, 254
(3d Cir. 2002). Indeed, actual conflicts of interests in the § 327
context do not have a strict definition. Id. at 251. Courts thus
proceed “case-by-case.” Id. (quoting BH&P, 949 F.2d at
1315). Pragmatically, a conflict is actual when the specific
facts before the bankruptcy court suggest that “it is likely that
a professional will be placed in a position permitting it to favor
one interest over an impermissibly conflicting interest.” Id.Century asks us to adopt a new rule and hold that courts
must always consider the applicable Rules of Professional
Conduct before reaching a conclusion on § 327. We decline to
do so. Section 327 and the Rules of Professional Conduct
impose independent obligations. Cf. Congoleum, 426 F.3d at687–92 (analyzing separately the applicable Rules of
Professional Conduct and § 327); see also 1 Collier on
Bankruptcy § 8.03[2] (“[A]ttorneys have an independent duty,
apart from the particular requirements of the Bankruptcy Code
12
or rules, to conform their activities to [the local rules governing
professional conduct].”). Professional conduct rules may be
relevant and “consulted when they are compatible with federal
law and policy . . . .” Congoleum, 426 F.3d at 687. 4
Yet, depending on the facts, the Bankruptcy Court may
not need to examine the relevant professional rules to decide a
§ 327 retention. Such was the case here. The provision makes
clear that its purview is focused primarily on the interests of
the estate. When professionals “hold or represent an interest
adverse to the estate,” they cannot be retained. 11 U.S.C.
§ 327(a) (emphasis added). This focus is reiterated in
§ 327(a)’s second prong: professionals must be
“disinterested”—most relevant, they cannot have an “interest
materially adverse to the interest of the estate.” Id.
§ 101(14)(c). 5
4
Also, in an analogous situation, violating those rules in
soliciting creditors’ committee members tainted a firm’s
eligibility for retention as committee counsel. See In re
Universal Bldg. Prods., 486 B.R. 650, 658–61 (Bankr. D.
Del. 2010).
5
We also note that § 327(a) is written in the present tense: it
bars the retention of professionals who “hold or represent”
adverse interests. It only allows disqualifications for adverse
interests that exist at the time of retention. Accord In re
AroChem Corp., 176 F.3d 610, 623 (2d Cir. 1999) (“[C]ounsel
will be disqualified under section 327(a) only if it presently
‘hold[s] or represent[s] an interest adverse to the estate,’
notwithstanding any interests it may have held or represented
in the past.” (alterations in original)); see also United States v.
Wilson, 503 U.S. 329, 333 (1992) (“Congress’ use of a verb
tense is significant in construing statutes.”). While any conflict
13
The relevant issue in our case is thus whether a possible
conflict implicates the economic interests of the estate and
might lessen its value. See In re First Jersey Sec., Inc., 180
F.3d 504, 509 (3d Cir. 1999) (“A Court may consider an
interest adverse to the estate when counsel has ‘a competing
economic interest tending to diminish estate values or to create
a potential or actual dispute in which the estate is a rival
claimant.’”); accord In re Am. Int’l Refinery, Inc., 676 F.3d
455, 461 (5th Cir. 2012) (providing, inter alia, the same
definition for “interest[s] adverse”); In re AFI Holding, Inc.,
530 F.3d 832, 845 (9th Cir. 2008) (same); AroChem, 176 F.3d
at 623 (same); In re Crivello, 134 F.3d 831, 835 (7th Cir. 1998)
(same); In re Prince, 40 F.3d 356, 361 (11th Cir. 1994) (same).
In this context, the conflict alleged by Century was
outside the scope of § 327(a). The Bankruptcy Court explained
it was “in no way convinced that Sidley generally cannot
effectively represent BSA. This is not a situation where the
[C]ourt is concerned that proposed counsel has a bias in favor
of a non-debtor entity such as a parent or significant creditor.”
J.A. at 33. Century has not meaningfully challenged the
Bankruptcy Court’s factual finding that Sidley did not have an
interest adverse to the estate. Century asserts that Sidley had a
conflict because it was violating Rule 1.7 but does not explain
why this violation, if it indeed occurred, impeded Sidley’s
here has now ceased, Century argues that there was an actual,
concurrent conflict that continued between at least Sidley’s
retention application on February 18, 2020, and when Sidley
dropped Century as a client on February 20 or 24. But we do
not need to explore this timing question because, as explained
below, the putative conflict was outside the purview of §
327(a).
14
effective representation of BSA for purposes of § 327(a). This
is unsurprising, as Haynes and Boone served as BSA’s
dedicated insurance counsel at all relevant times, and BSA was
not a party to the reinsurance matters Sidley worked on for
Century. Nor has Century explained why its positions in the
reinsurance disputes are opposed to BSA’s interests during its
reorganization. On these facts, the Bankruptcy Court did not
abuse its discretion in ruling there was no actual conflict under
§ 327.
Still, the Rules of Professional Conduct may be
informative in some cases. For example, in Congoleum, 426
F.3d at 679, we held that Congoleum’s counsel—Gilbert,
Heinz & Randolph LLP—violated the Rules of Professional
Conduct and § 327 for the same reason. But Century draws the
wrong conclusion from that case. We never stated that
violations of the Rules of Professional Conduct are themselves
sufficient to create a § 327 conflict. Rather, we explained that
the same facts showing Gilbert had violated its professional
obligations under the Rules also meant it was not disinterested
for purposes of § 327. Congoleum’s facts were markedly
different than those before us: while Gilbert was representing
Congoleum, it was also assisting claimants in settlement
negotiations with that entity. That arrangement directly
implicated its loyalty to Congoleum. Here, by contrast, Sidley
represented Century in reinsurance matters in which BSA was
not a party, and Sidley’s representation of BSA excluded
insurance issues.
Because Sidley’s relationship to Century did not affect
its ability to advocate on behalf of BSA, it was not an “actual
conflict” under § 327 even if Century had legitimate concerns
about Sidley’s compliance with the applicable Rules of
15
Professional Conduct. Accordingly, the Bankruptcy Court
reasonably ruled that Sidley’s retention did not require
disqualification under § 327.
C. Rules of Professional Conduct
A court may use its inherent disciplinary power over the
advocates appearing before it to disqualify an attorney. In re
Corn Derivatives Antitrust Litig., 748 F.2d 157, 160 (3d Cir.
1984). The conduct of attorneys practicing in federal court is
governed by the local rules of the court. See Congoleum, 426
F.3d at 687. Local Rule 9010-1(f) for the United States
Bankruptcy Court for the District of Delaware provides that
“all attorneys admitted or authorized to practice before this
Court . . . shall . . . be governed by the Model Rules of
Professional Conduct of the American Bar Association, as may
be amended from time to time.”
As noted, Century asked the Bankruptcy Court to
disqualify Sidley from representing BSA because (in Century’s
view) Sidley violated at least one of two Model Rules of
Professional Conduct that regulate the attorney-client
relationship: Rules 1.7 and 1.9. The first governs obligations
to current clients and states that, unless certain listed
exceptions apply, “a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest.”
Model Rules of Pro. Conduct r. 1.7 (Am. Bar. Ass’n 1983).
This occurs when “(1) the representation of one client will be
directly adverse to another client; or (2) there is a significant
risk that the representation of one or more clients will be
materially limited by the lawyer’s responsibilities to another
client, a former client or a third person or by a personal interest
of the lawyer.” Id. The second governs obligations to former
clients. It states that, absent consent, “[a] lawyer who has
16
formerly represented a client in a matter shall not thereafter
represent another person in the same or a substantially related
matter in which that person’s interests are materially adverse
to the interests of the former client.” Model Rules of Pro.
Conduct r. 1.9; see also Model Rules of Pro. Conduct r. 1.10
(Am. Bar Ass’n 1983) (extending the obligations of Rules 1.7
and 1.9 to all attorneys within the same firm).
Because the power to disqualify stems from a court’s
authority to supervise the attorneys appearing before it, a
decision about whether to use that power is discretionary and
“never is automatic.” Miller, 624 F.2d at 1201. Even when an
ethical conflict exists (or is assumed to exist), a court may
conclude based on the facts before it that disqualification is not
an appropriate remedy. Relevant factors depend on the
specifics of the case, but generally include the ability of
litigants to retain loyal counsel of their choice, the ability of
attorneys to practice without undue restriction, preventing the
use of disqualification as a litigation strategy, preserving the
integrity of legal proceedings, and preventing unfair prejudice.
See Corn Derivatives, 748 F.2d at 162; see also TQ Delta, LLC
v. 2Wire, Inc., No. 13-1835, 2016 WL 5402180, at *6 (D. Del.
Sept. 26, 2016) (identifying these and other possible
considerations). Sometimes disqualification is more disruptive
than helpful even though an attorney may not have satisfied his
or her professional obligations. And, indeed, courts in our
Circuit often deny disqualification even when finding or
assuming conflicts under the professional conduct rules. See,
e.g., TQ Delta, 2016 WL 5402180, at *6–7 (denying motion
for disqualification despite violation of Rule 1.9); Bos. Sci.
Corp. v. Johnson & Johnson Inc., 647 F. Supp. 2d 369, 374 (D.
Del. 2009) (“[Counsel’s] violation of Model Rule 1.7
notwithstanding, the court concludes that disqualification is
17
not the appropriate remedy under the circumstances.”); Wyeth
v. Abbott Lab’ys, 692 F. Supp. 2d 453, 458–59 (D.N.J. 2010)
(denying motion for disqualification even though there was
“no dispute” that counsel violated Rule 1.7); Elonex I.P.
Holdings, Ltd. v. Apple Comput., Inc., 142 F. Supp. 2d 579,
583 (D. Del. 2001) (even were Rule 1.7 violated,
disqualification would not have been warranted).
Here, the Bankruptcy Court followed this practice.
Though it did not definitively decide whether Sidley had
violated any professional responsibility rules, it determined
that disqualification was inappropriate regardless. Century
could not have been adversely affected, the Court found,
because Sidley’s bankruptcy team did not receive any
confidential or privileged information from the attorneys
working on Century’s reinsurance matters. In contrast, BSA,
the Bankruptcy Court also found, would have been adversely
affected if the firm were disqualified. 6 These factual findings
were well supported, and Century does not directly challenge
them. Cf. Century’s Op. Br. at 47–48 (arguing that Sidley must
have been aware of privileged information from the
reinsurance matters but not suggesting that any such
information was passed to the team handling BSA’s
reorganization). Because Sidley’s representation of BSA did
not prejudice Century, but disqualifying it would have been a
6
Because Sidley is no longer actively involved in the case,
Century argues that disqualification would no longer prejudice
BSA. But this is of no moment. We review the Bankruptcy
Court’s decision based on the record before it at the time of its
decision. See Anderson v. City of Bessemer City, 470 U.S. 564,
574 (1985) (explaining that a factual finding is “clearly
erroneous” only when implausible “in light of the record”).
18
significant detriment to BSA, it was well within the Court’s
discretion to determine that the drastic remedy of
disqualification was unnecessary. 7
In the alternative, Century asks us to hold at least that
courts should apply Rule of Professional Conduct 1.7 in cases
(including, according to Century, this one) where a law firm
dropped an existing client to avoid conflicts that would prevent
it from taking on a more lucrative client. Under this concept—
known as the “hot potato” doctrine—courts apply the more
stringent Rule 1.7 standards even though representation has
formally ended to discourage firms from dropping a client (like
a hot potato) for self-interested reasons. See, e.g., Merck
Eprova AG v. ProThera, Inc., 670 F. Supp. 2d 201, 209
(S.D.N.Y. 2009). There are not enough facts to put that
principle into play in our case. Accordingly, we save
consideration of it for the future.
* * * * *
In holding that the Bankruptcy Court permissibly
allowed BSA to retain Sidley as its restructuring counsel, our
concern is primarily whether it could effectively represent
BSA in its bankruptcy case. Whether it did so in Century’s
7
Century now requests other remedies (e.g., disgorgement of
fees) as alternatives to disqualification. But it argued only for
disqualification before the Bankruptcy Court, and so it has
forfeited any request for other remedies. See In re Handel, 570
F.3d 140, 143 (3d Cir. 2009). Moreover, it is within the
Bankruptcy Court’s discretion to weigh the same
considerations when imposing alternative remedies in lieu of
disqualification as when imposing disqualification itself.
19
reinsurance matters is a separate question that Century can
independently challenge in its arbitration proceeding with
Sidley. But as to the issue before us, § 327 is the test the
Bankruptcy Code requires. Though a court’s decision on
retention may be informed by counsel’s conduct implicating
the Rules of Professional Conduct, the facts before us do not
require that this be done. The Bankruptcy Court properly
focused on § 327 and took Century’s concerns seriously. It
also did not hastily jump to a conclusion; it looked carefully at
the specific facts before it and reasonably approved BSA’s
retention of Sidley. This is nowhere close to an abuse of
discretion. We thus affirm the approval of its judgment by the
District Court.
20