When is a Conflict a Conflict: Cullen and Dykman Secures Win in Bankruptcy Counsel Retention Proceeding

Once a client has engaged its law firm, the firm will undertake a conflict check to ensure there are no ethical reasons why the firm cannot proceed on behalf of its client.  Even then, objections may be heard from the court or other parties who perceive there is or may be a conflict.  In a recent case, it was neither a party, nor the court, but the office of the United States Trustee which objected to the client’s choice of counsel.

On July 21, 2025, Cullen and Dykman’s bankruptcy team achieved a major victory in the U.S. Bankruptcy Court for the Southern District of New York on behalf of Sysorex Government Services, Inc. (the “Debtor”), an information technology solutions company primarily serving federal, state and local governments. In addition to approving the sale of Debtor’s business for about $8.5 million, U.S. Bankruptcy Judge John P. Mastando approved the debtors request to retain Cullen and Dykman as bankruptcy counsel over an objection from the Office of the U.S. Trustee (a division of the U.S. Department of Justice) related to alleged conflicts of interest.[1]

A. Disinterestedness and Conflicts of Interest in Bankruptcy

Under the Model Rules of Professional Responsibility, attorneys must avoid representing clients with adverse interests or holding personal interests that conflict with the client representation. In bankruptcy proceedings, the United States Bankruptcy Code (the “Code”) provides an additional standard stating that professionals, including attorneys, must be disinterested. Section 327 of the Code specifies that an interested person includes being a creditor, insider, former officer, or holding any materially adverse interest to the estate. However, the Code does not explicitly define “adverse interest”. Courts have held that professionals hold adverse interests to the bankruptcy estate when two or more parties possess competing claims to the same economic interest. Professionals, including law firms, must submit a statement of disinterestedness when seeking to represent debtors and creditors’ committees under Chapter 11 which details any potential conflicts of interest. These issues are typically evaluated by the court on a case-by-case basis to determine whether a conflict does exist.[2]

B. The U.S. Trustee’s Objection to Debtor’s Application to Retain Cullen and Dykman

On July 3, 2025, the Debtor filed an application for retention of Cullen and Dykman as bankruptcy counsel. On July 10, 2025, the Office of the U.S. Trustee objected to the application as a result of Cullen and Dykman’s representation of the Debtor’s president, parent company, and parent company’s CEO in another proceeding, Cannon USA, Inc. v. Sysorex Inc. (the “Cannon Lawsuit”). In the Cannon Lawsuit, it was alleged that the Debtor made fraudulent transfers of assets to their parent company. This previous case was the central issue for the court to determine whether a conflict of interest existed.

During the July 21, 2025 hearing (the “Hearing”), the U.S. Trustee asserted that, by allowing Cullen and Dykman to represent the Debtor in this action, preferential treatment of parties and credibility issues may arise consequently.[3] The Trustee further asserted that a perception of conflict would be created by allowing Cullen and Dykman to represent the Debtor.[4] The Trustee’s main argument focused on the idea that Cullen and Dykman would need to review the merits of the fraudulent transfer allegations of the Debtor’s funds in the Cannon Lawsuit.[5] As a consequence of their representation in this matter, the Trustee contended that Cullen and Dykman would not be able to carry out their fiduciary responsibilities to the parties that are the target of this litigation, creating an adverse interest to the bankruptcy estate.[6]

C. Debtor’s Counsel’s Response: Alignment of Interests and Disclosure

Cullen and Dykman partner Ralph Preite disclosed Cullen and Dykman’s representations of the Cannon Lawsuit defendants in his declaration supporting the firm’s retention as Debtors’ counsel. Within this declaration, Mr. Preite describes that it was mutually understood that Cullen and Dykman could handle the Cannon Lawsuit settlement negotiations, but any litigation after the commencement of the case would need to be handled by other counsel. Cullen and Dykman further noted in its Reply to the U.S. Trustee’s Objection that the Cannon Lawsuit was wholly unsupported and lacks any factual basis.

The principal contention argued by Cullen and Dykman during the Hearing was that there were no interests adverse to the bankruptcy estate, as the economic interests of the Debtor and the defendants in the Cannon Lawsuit would be consistent in seeking the dismissal of the case.[7] Although the Debtor was not a defendant in the Cannon Lawsuit, the conduct alleged still may harm the bankruptcy estate.[8] If these allegations were proven true, the Debtor’s president could have lost his security clearance, jeopardizing the company’s entire future.[9]

D. Court’s Holding: No Conflict of Interest Found

The court agreed with Cullen and Dykman, finding that it did not perceive a conflict by allowing them to represent the Debtor.[10] As discussed by the court, the standard established by the Second Circuit for whether an adverse interest exists is whether an economic interest lessens the value of the bankruptcy estate or creates disputes in which the bankruptcy estate is a party.[11] The court explained that Cullen and Dykman took corrective measures to eliminate any actual or perceived conflict by disclosing how it intended to address the Cannon Lawsuit moving forward.[12] As noted by Cullen and Dykman, any post-petition litigation would have had to be handled by other counsel.[13] The court concluded that the alignment of economic interests in the dismissal of the Cannon Lawsuit was sufficient to find that an adverse interest to the bankruptcy estate did not exist.[14] As a result, the court overruled the objection to the retention of counsel and approved Cullen and Dykman’s application.[15]

E. Conclusion and Practical Implications

While chapter 11 attorneys have a fiduciary duty to act in the best interest of the bankruptcy estate, they may represent related entities to protect any aligned interests. This is permissible when the interests of the estate and related entities are not adverse and the proper disclosures are made. It is essential to avoid conflicts of interest to ensure that attorneys can provide loyal, and unbiased representation. The results of the Hearing highlights the importance of clear disclosures in retention applications because when a conflict does exist, it can potentially undermine the integrity of the legal process.

Please note this is a general overview of developments in the law and does not constitute legal advice.  Nothing herein creates an attorney-client relationship between the sender and the recipient.  If you have any questions regarding the provisions discussed above, or any other aspect of bankruptcy law, please contact Michael H. Traison (mtraison@cullenllp.com), Ralph Preite (rpreite@cullenllp.com) or Sharlene Cubelo (scubelo@cullenllp.com).

Thank you to Joshua Kaye, a summer associate, who assisted in the preparation of this alert.

About Cullen and Dykman’s Bankruptcy and Creditors’ Rights Practice

Cullen and Dykman’s Bankruptcy and Creditors’ Rights practice offers clients a unique perspective into the issues involved in complex bankruptcy proceedings in a wide range of industries. We have represented secured creditors, debtors, unsecured creditors’ committees, and individual unsecured creditors in Chapter 11 cases filed throughout the country, and we are skilled in resolving issues among various constituencies in complex Chapter 11 proceedings. We also have significant experience in out-of-court workouts, restructurings and bankruptcy litigation, and we have secured favorable results for our clients in complex bankruptcy cases throughout the country.

Footnotes

[1] This would be Cullen and Dykman’s second successful response on behalf of the Debtor to issues raised by the Office of the U.S. Trustee. See our earlier article: Cullen and Dykman's Representation of Sysorex Government Services Inc. Featured in Law 360 and Bloomberg.

[2] See Interested But Disinterested: Conflicts In Bankruptcy.

[3] Transcript of Record at 55, In re Sysorex Government Services, Inc., Case No. 25-10920-jpm (S.D.N.Y July 21, 2025).

[4] Id. at 66.

[5] Id. at 62-63.

[6] Id. at 63.

[7] Id. at 65.

[8] Id.

[9] Id.

[10] Id. at 66.

[11] Id. at 63.

[12] Id. at 66.

[13] Id.

[14] Id. at 66-67.

[15] Id. at 67.