Turnaround and restructuring services seek to save a financially distressed business by identifying problems and working with the client to make changes to how the business is run, including its financial and operational aspects. However, if the business is no longer able to be saved, it enters into bankruptcy and liquidation proceedings.
Edward 'Ted' Gavin CTP, NCPM, Managing Director and Founding Partner of corporate turnaround and restructuring firm Gavin/Solmonese (G/S), says that professional ethics demand adequate and proper disclosure for parties in turnaround, restructuring, and bankruptcy proceedings, which is supposed to be an open and transparent process that can only happen when all parties are forthcoming.
Gavin has planned and led legal ethics education and he places high importance of adhering to these standards in the conduct of G/S' business. He is also a mediator and is often called on to be an expert witness in bankruptcy litigation. According to the US bankruptcy rules, attorneys, financial advisors, and other parties to the case have to disclose their connections with other parties. For example, firms hired by a debtor can't have an interest adverse to their client.
Gavin says that there are cases where an advisor or a law firm has done a lot of work for another party, in some cases for example, the secured lender. This can become a problem because then it gets into a discussion of how material the work for the other party is to the firm as a whole. There are also creditors who have interests in things that are undisclosed, so it's hard to be sure in whose interest they're acting. This complicates the process, even in instances where one party has an undisclosed non-monetary or non-business relationship with another party.
"Recently, a bankruptcy judge resigned before disciplinary proceedings commenced, arising from an undisclosed romantic relationship with an attorney who was practicing before him and whose firm was awarded millions of dollars in fees across multiple cases," Gavin says. "But neither the judge nor the lawyer disclosed the relationship. Now, that incident has upturned the apple cart on a number of different cases, because now you have parties trying to reopen old cases. It's messy, and it's an unforced error."
According to Gavin, bankruptcy rules state that parties have to disclose connections, but "connections" is mostly left undefined by the bankruptcy regulator, the United States Trustee Program. He believes this is both a blessing and a curse. While this gives flexibility, it also creates ambiguity. Opposing parties may point to a very tenuous, loose, and distant relationship and say that the other party should have disclosed it. This becomes a subjective judgment call of materiality.
Gavin believes that disclosure rules could be less vague on which relationships should be disclosed. He also believes that over-disclosure won't be a problem, as long as parties are being honest. As a rule of thumb, it's better to disclose than to not disclose.
Furthermore, Gavin reminds professionals, especially non-lawyers such as financial advisors, to remember their scope of work. Overstepping their bounds can lead to penalties, including loss of income, fines, or revocation of professional licenses.
"When someone is looking back and challenging the decisions you made over what to disclose or not, that means things have already gone bad," Gavin says. "No one is looking at disclosures on a good day, where everyone is happy about the results. Looking through the lens of having an adversarial position where people are not happy, what is the light in which they're going to see your decisions to disclose or not to disclose? There are obvious connections and there are non-obvious connections. People tend to get into trouble over the non-obvious connections, but, surprisingly, they also get into trouble on the obvious ones."
