Lawyer’s Fiduciary Duties to Non-Clients — Debtor’s Counsel Owes Fiduciary Duty to Estate

In a decision that has important implications outside the bankruptcy context, Bankruptcy Judge Martin Glenn ruled in In re Food Mgmt. Group, LLC (Grubin v. Rattet), 380 B.R. 677, 2008 Bankr. LEXIS 112 (Bankr. S.D.N.Y. Jan. 23, 2008), that counsel to the debtor owes a fiduciary duty to the estate (as opposed to the duty owed to the debtor in possession, counsel’s client). Judge Glenn noted that this issue has not been resolved by the Second Circuit and he determined that, while not deciding the full scope of the duty, it “is certainly narrower than a lawyer's duties to its client. A lawyer owes a duty to a nonclient, and can be held liable for breach, in narrower circumstances.” He looked to § 51(4) of the Restatement (Third) of the Law Governing Lawyers (2000), which, “while not specifically described as applying to the bankruptcy context nevertheless provides a good fit to the circumstances of counsel for a debtor in possession.” This provision holds that a lawyer owes a duty of care, and may be liable for breach,

(4) to a nonclient when and to the extent that:

(a) the lawyer's client is a trustee, guardian, executor, or fiduciary acting primarily to perform similar functions for the nonclient;

(b) the lawyer knows that appropriate action by the lawyer is necessary with respect to a matter within the scope of the representation to prevent or rectify the breach of a fiduciary duty owed by the client to the nonclient, where (i) the breach is a crime or fraud or (ii) the lawyer has assisted or is assisting the breach;

(c) the nonclient is not reasonably able to protect its rights; and

(d) such a duty would not significantly impair the performance of the lawyer's obligations to the client.

Judge Glenn held that this duty arises when the lawyer knows or has reason to know that appropriate action by the lawyer is necessary to prevent or mitigate a breach of the client's fiduciary duty.

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