The Restructuring Report

Debtor’s counsel in In re Black Diamond Energy of Delaware, Inc. (FN: Case No. 22-21448-GLT, Bankr. W.D. Pa.) are learning the hard way that what you do not catch the first time often comes back to haunt you. On March 6, 2026, U.S. Bankruptcy Judge Gregory Taddonio continued his inquiry into a Chapter 11 debtor’s counsel’s failure to detect and disclose the firm’s prior representation of the estate’s largest secured creditor (big whoops). Only partially satisfied by the firm’s disclosures, he issued an order requiring supplemental evidence and scheduled an evidentiary hearing on a previous order to show cause.

Counsel seeking to be retained under § 327, § 1103 or § 1114 of the Bankruptcy Code know that Bankruptcy Rule 2014 requires professionals to submit a verified statement setting forth — to the best of the professional’s knowledge — all the professional’s connections with the debtor, creditors and certain other parties. The court requires this information to make a full determination if a conflict exists and if the professional is “disinterested.”

According to the firm, it unintentionally failed to disclose that it previously represented the debtor’s largest secured creditor due to administrative errors made by a former associate. The associate filed a complaint in Wyoming on behalf of the debtor and the debtor’s main secured creditor (PDH) as co-plaintiffs. When opening a file within the firm’s internal system, the associate only included the debtor as the client.

As the litigation progressed, the debtor was removed as a plaintiff to preserve federal diversity jurisdiction, leaving PDH as the only plaintiff. The firm’s internal system was not corrected or updated to reflect this change. (FN: The firm represented that it has implemented new protocols and commissioned a forensic review of its systems.) The associate then unexpectedly passed away.

Another lawyer with the firm (the same lawyer whose incomplete declaration is at the center of this issue) appeared in the Wyoming action to inform the court of the associate’s death, and then withdrew, ending the representation of PDH. Four years later, when the debtor approached the firm about a bankruptcy case, the lawyer did not recall the prior engagement for PDH, and a conflict check did not locate it either. The court found that the firm acted reasonably, despite not discovering or correcting the errors in its system.

But the court had remaining questions. The Wyoming litigation, where the firm represented PDH, involved substantially similar claims to an adversary proceeding that was central to the debtor’s Chapter 11 plan. The court noted that debtor’s counsel reviewed pleadings from the Wyoming litigation and was incredulous that the firm would not have noticed that it represented PDH in that case. The court discovered the connection in less than an hour, while the firm spent significantly more time analyzing the claims from the Wyoming litigation. As a result, the court could not yet conclude that the nondisclosure was entirely innocent. The court ordered the firm to provide additional evidence and set the matter for an evidentiary hearing.

For lawyers who seek to be employed in bankruptcy cases, this case provides two key reminders:

• First, a lawyer’s obligations go beyond just making truthful declarations. While Bankruptcy Rule 2014 and the relevant rules of professional conduct focus on the actual knowledge of the professional, the comments to the Model Rules of Professional Conduct impose a duty to conduct a “reasonably diligent inquiry” when a lawyer makes an assertion of fact to a court. (FN: See Comment [3] to Rule 3.3.) To make a reasonably diligent inquiry, the lawyer must have reliable systems and processes to ensure accurate information is available.
• Second, lawyers have an obligation to ensure that declarations are updated if new information is uncovered or arises. This is often missed, as the focus has understandably shifted to the client’s broader goals and the lawyer who prepared the initial declaration may not be involved in all later developments in the case. Stay diligent and make compliance a team effort.

For questions or more information, contact James Brand.