## Facts

- Chile B. Lee and Hae Sook Lee (the Lees) operated and wholly owned the Seoul Corporation (Seoul), a merchandise and jewelry wholesaler.
- Seoul first filed a Chapter 11 bankruptcy case seeking reorganization.
- The Lees later filed a separate Chapter 11 case in their individual capacities.
- The Lees and Seoul had numerous overlapping creditors, and the individual and corporate debtors were jointly liable on many obligations.
- The same law firm sought to represent both Seoul and the Lees in their separate Chapter 11 cases.
- The firm filed parallel applications in the bankruptcy court requesting appointment as counsel in each case.
- In the applications, the firm represented that it was not connected with any other party in interest (other than the debtor client in that case).
- The firm intentionally failed to disclose that the two Chapter 11 filings were related and that it was seeking employment in both cases.
- After the bankruptcy court learned of the parallel filings and the relationship between the two debtors, it issued an order to show cause why the firm should not be disqualified from representing both debtors.

## Issues

1. May a bankruptcy court approve the same counsel under 11 U.S.C. § 327(a) to represent both related Chapter 11 debtors (a closely held corporation and its owner-operators) when their estates have overlapping creditors and joint debts, and counsel failed to disclose the relationship and its dual employment requests as required by Bankruptcy Rule 2014?

## Decision

- The court declined to approve the law firm’s appointment to represent both debtors in the related Chapter 11 cases.
- The court found the proposed dual representation created a conflict (or unacceptable risk of divided loyalty) because the two estates’ interests could diverge despite common ownership and overlapping creditors.
- The court held that the firm’s lack of full disclosure about the related cases and the dual applications violated the disclosure duties imposed by § 327 and Bankruptcy Rule 2014.
- The order to show cause resulted in disqualification/denial of employment based on the conflict and the nondisclosure.

## Legal Principles

- Under 11 U.S.C. § 327(a), a debtor in possession may employ counsel only if counsel is “disinterested” and does not hold or represent an interest adverse to the estate.
- Representing two related Chapter 11 debtors can be improper when creditor bodies and liabilities overlap but are not identical, because choices about payment, claim treatment, intercompany dealings, and plan terms may favor one estate over the other.
- Bankruptcy Rule 2014 requires complete, candid disclosure of counsel’s connections with the debtor, creditors, and other parties in interest; this includes connections arising from representation sought or undertaken in related bankruptcy cases.
- The disclosure obligation is affirmative; counsel cannot omit relationships based on its own view that the facts are harmless or that a conflict has not yet become actual.
- Failure to disclose relevant connections is itself grounds to deny employment, independent of whether the court also finds a disqualifying conflict.

## Conclusion

In *In re Lee*, the bankruptcy court refused to appoint a single law firm to represent both a closely held corporate Chapter 11 debtor and its owner-operators in their separate Chapter 11 case where the estates shared many creditors and liabilities, creating a serious risk that counsel’s duties would conflict. The court also relied on the firm’s intentional nondisclosure of the related filings and its parallel employment requests, concluding that § 327(a) and Rule 2014 demand full disclosure and conflict-free representation before the court will approve debtor’s counsel.


In re Lee, 94 B.R. 172 (1989)