One Law Firm Representing Jointly-Administered Debtors: It Doesn’t Always Work (Whitehall v. Lehigh)

Can’t always see it (photo by Marilyn Swanson)

Chapter 11 bankruptcy filings by affiliated entities are common, as is joint administration of their bankruptcy cases with a single law firm representing them all.

However, such common representation cannot be taken for granted.

Here is an example of it not working: Whitehall Trust v. Lehigh Valley 1, LLC, Case No. 26-662, U.S. District Court for Eastern Pennsylvania, decided May 18, 2026, Doc. 23. What follows is a summary of this opinion.

Facts

These four Debtors file their voluntary Chapter 11 petitions in the Eastern District of Pennsylvania:

Whitehall Trust, Case No. 25-15241;
Saucon Trust, Case No. 25-15243;
Whitehall Manor, Inc., Case No. 25-15244; and
Saucon Manor, Inc., Case No. 25-15245.

The four debtors seek joint administration of their cases, which is granted—with Case No. 25-15241 designated as the lead case.

The two Trust Debtors own real estate that they lease to the two Manor Debtors for operation as personal care homes.

Creditor holds mortgage liens on Trust Debtors’ properties. Creditor starts foreclosing its liens, so each of the four debtors files bankruptcy to stay the foreclosure.

In their bankruptcies, the four debtors seek approval of a single Law Firm to represent them all. Creditor objects, alleging conflicts of interest between, (i) two Trust Debtors on the one hand, and (ii) two Manor Debtors on the other. After a hearing, the Bankruptcy Court approves the Law Firm’s employment by all four debtors.

Creditor appeals the Law Firm approval to the District Court, which reverses. Here’s why.

Relationship of the Debtors—Conflicting Stories

In the mortgage foreclosure:

Trust Debtors and their counsel repeatedly represent that they are completely separate and distinct from Manor Debtors, with differing interests and ownership;
Trust Debtors employ their own and separate attorneys for a motion to quash subpoena and represent that they have absolutely no access to documents held by Manor Debtors;
Trust Debtors assert that they and Manor Debtors:
- “not only do not share a parent-subsidiary relationship but are not even in a corporate relationship at all”;
- “the only connection between the entities is wholly personal”; and
the Court finds no indication that Trust Debtors and Manor Debtors operated as a single functional unit.

Once the four debtors file bankruptcy and all seek employment of the same Law Firm, the story changes: they now claim they have been a single business enterprise all along, under the ultimate control of a single person and with their interests fully aligned.

In testimony before the Bankruptcy Court, the allegedly-controlling person insists that the separateness representations in the foreclosure were “a mistake,” “improper,” and “incorrect.”

The District Court declares:

“I cannot be certain what the relationship actually is” between Trust Debtors and Manor Debtors;
“I am certain, however, that there is a significant dispute as to the Debtors’ claim that they are all ‘co-dependent entities’”—if they are co-dependent:
- why did they need separate counsel in the foreclosure on a simple and routine motion to quash; and
- how could the same entities all now engage common bankruptcy counsel for something as complex as their bankruptcies?; and
“I have many questions and concerns” about the relationship of the four debtors, as well as their candor—including that of their counsel.

Legal Standards

Section 327(a) permits a debtor, “with the court’s approval” to “employ one or more attorneys.”

Employment under this section is only for professionals that do not “hold or represent an interest adverse to the estate and are disinterested.”

Disinterested is defined as people who do not have an interest materially adverse to the interest of the estate or of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.

The four debtors and the Law Firm bear the burden of establishing that the Law Firm is disinterested and does not represent an interest adverse to the estate.

Conflicts of Interest

There are 3 categories of §327 conflicts.

Actual conflicts of interest. A conflict is actual when it is likely that a professional will be placed in a position permitting it to favor one interest over an impermissibly conflicting interest. The existence of an actual conflict of interest results in a per se disqualification of an attorney.
Potential Conflicts of interest. A potential conflict of interest can result in disqualification of counsel, unless the possibility that the potential conflict will become actual is remote—and then court uses its discretion in assessing this type of potential conflict.
Appearances of conflict. Counsel may not be disqualified based upon the appearance of a conflict alone.

Arguments

Creditor argues that Law Firm has an actual conflict of interest in representing both Trust Debtors and Manor Debtors and therefore should be barred from representing all four entities.

The four debtors claim no actual conflict because they operate as a single business enterprise, have a group obligation to creditors, and are ultimately controlled by one person.

Findings

“I find that an actual conflict of interest exists” that bars Law Firm from representing both groups of Debtors:

Trust Debtors own the real property that is leased to Manor Debtors;
the only source of income for Trust Debtors is rent from Manor Debtors;
to operate successfully and pay their mortgages, taxes, insurance, etc, Trust Debtors need to receive the maximum possible amount of rent from Manor Debtors; and
conversely, to be as profitable as possible, Manor Debtors need their monthly rent payments to Trust Debtors to be as low as possible.

So, the two groups of Debtors have very different interests that create a clear, actual conflict of interest that will not permit Law Firm to represent both groups in bankruptcy.

Here’s a specific example of the actual conflict:

§ 365(d)(3) requires a tenant debtor to make post petition rent payments on non-residential real property until a plan is confirmed;
Creditor argues that the leases between Trust Debtors and Manor Debtors are non-residential leases so that § 365(d)(3) applies, requiring Manor Debtors to pay rent to Trust Debtors; but
Manor Debtors argue that the leases are residential leases so that § 365(d)(3) does not apply; and
the fact that Law Firm argues on behalf of all four debtors that the leases are residential leases goes to the very conflict of interest I find so concerning—how can the same law firm properly advise both Trust Debtors and Manor Debtors on such matters?

Ruling

It cannot be denied that an actual conflict of interest exists with respect to Manor Debtors’ obligation to pay rent to Trust Debtors and in what amount.

Accordingly, Law Firm cannot properly advise both Trust Debtors and Manor Debtors on how the leases between them should be treated in the bankruptcies.

Therefore, Law Firm cannot represent both Trust Debtors and Manor Debtors in the bankruptcy proceeding, and the Bankruptcy Court’s order authorizing Debtors to employ Law Firm for all four Debtors must be vacated.

Conclusion

Could this case have turned out differently, if the debtors had not taken inconsistent positions in the foreclosure and bankruptcy proceedings?

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.