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Federal bankruptcy law is unique among all bodies of substantive law. It has superimposed upon the bankruptcy practice conflict-of-interest concepts that are quite removed from conflicts rules that apply to every other body of law. One seemingly innocuous sentence has spawned dozens of cases, numerous law review articles, and little agreement about what it means or whether it should be changed. We are referring to 11 U.S.C. § 327(a), which provides in part:
[T]he trustee, with the court's approval, may employ one or more attorneys, . . . that do not hold or represent an interest adverse to the estate, and that are disinterested persons . . . .
(Similar language appears at 11 U.S.C. § 328(c) with respect to compensation of committee representatives.)
11 U.S.C. § 1107(a) provides that a debtor-in-possession (DIP) shall have the rights and duties of a trustee, so § 327(a) also applies to lawyers hired by DIPs. A "disinterested person" is defined at § 101(14). "Interest adverse to the estate" is not defined.
To get an idea about the complexity that these concepts introduce into the bankruptcy practice, consider that a leading - and very concise - law review article discussing them is 110 pages long. Gerald K. Smith, Conflicts of Interest in Workouts and Bankruptcy Reorganization Cases
, 48 S.C.L. Rev. 793 (1997). Mr. Smith, a bankruptcy practitioner with a Phoenix law firm, discusses not only the cases construing the above provisions but also the struggles to get Congress to amend the law and to get the drafters of the Restatement to deal with these concepts in a useful way. He also discusses the interplay between state ethics rules and the concepts introduced by §§ 327 & 328.
Mr. Smith points out tellingly that none of the recognized treatises on legal ethics attempts to sort out the conflicts principles applicable to bankruptcy law. We are no better and will attempt little more. What follows are sources that anyone with a bankruptcy conflicts issue might find helpful. While we will not attempt a survey of the law in this area, this site will report significant new cases and helpful articles as they appear in the future.
Volume 18 of the Miss. C.L. Rev., published in 1998, contains a series of articles explaining attempts to change the law, describing attempts to get the American Law Institute to deal with these issues in the Restatement, and describing the debate over whether the "disinterestedness" standard should be abandoned. The articles are as follows: Todd J. Zywicki, Mend It, Don't End It: The Case for Retaining the Disinterested Requirement for Debtor in Possession Professionals
, 18 Miss. C.L. Rev. 291 (1998); Gerald K. Smith, Standards for the Employment of Professionals in Bankruptcy Cases: A Response to Professor Zywicki's "Case for Retaining the Disinterested Requirement for Debtor in Possession's Professionals,"
18 Miss. C.L. Rev. 327 (1998); Charles W. Wolfram, The Boiling Pot of Lawyer Conflicts in Bankruptcy
, 18 Miss. C.L. Rev. 383 (1998); and Todd J. Zywicki, Of Bubbling Pots and Bankruptcy Ethics: A Comment on Wolfram and Smith
, 18 Miss. C.L. Rev. 399 (1998).
The Wolfram article contains a refreshingly candid description of how the Restatement wound up not dealing with conflicts in the bankruptcy practice at all. It reminds one of the "making sausage" simile applied to legislation. Other Articles
. Final Report of the American Bankruptcy Institute National Ethics Task Force (April 21, 2013) (easily Googled; start with "American Bankruptcy Institute," then click on the report link);
Kohn, Shuster & Powar, Deciphering Conflicts of Interest in Bankruptcy Representation: An Update
, 105 Commercial L.J. 95 (2000); Richman, Multiple Clients in Bankruptcy Cases: When Do You Need Consent?
, 21 Am. Bankr. Inst. J. 14 (March 2002); Ronald D. Rotunda, Resolving Client Conflicts by Hiring “Conflicts Counsel,”
62 Hastings L. J. 677 (2011). "Actual" Versus "Potential" Conflicts
. This is a rubric found in the bankruptcy cases. The only other practice area where those concepts are used is the criminal practice. R. Craig Smith, Conflicts of Interest under the Bankruptcy Code: A Proposal to Increase Confidence in the Bankruptcy System
, 8 Geo. J. Legal Ethics 1045 (1995) discusses four kinds of cases in dealing with "actual" versus "potential" conflicts: (1) cases that would disqualify or punish firms for actual conflicts only; (2) a case recognizing that a potential conflict, if significant enough, might cause a disqualification; (3) cases that find both actual and potential conflicts disqualifying; and (4) cases that recognize a rebuttable presumption that potential conflicts are disqualifying.
(1) Only Actual Conflicts Disqualify. In re The Leslie Fay Companies, Inc
. 175 B.R. 525 (S.D.N.Y. 1994); In re: Global Marine, Inc., 108 B.R. 998 (S.D. Tex. 1987); In re: Waterfall Village of Atlanta, Ltd., 103 B.R. 340 (N.D. Ga. 1989); and In re: Stamford Color Photo, Inc., 98 B.R. 135 (D. Conn. 1989).
(2) Potential Conflicts Might Disqualify. In re: Martin
, 817 F.2d 175 (1st Cir. 1987).
(3) Both Actual and Potential Conflicts Disqualify. In re: Kendavis Ind. Int'l., Inc
., 91 B.R. 742 (N.D. Tex. 1988); and Roger J. Au & Son, Inc. v. Aetna Ins. Co
., 64 B.R. 600 (N.D. Ohio 1986).
(4) Presumption that Potential Conflicts Will Disqualify. In re BH&P Inc
., 949 F.2d 1300 (3d Cir. 1991); and In re American Printers & Lithographers, Inc.
, 148 B.R. 862 (N.D. Ill. 1992).
A more recent article that discusses bankruptcy conflicts in the context of a helpful hypothetical and that cites more recent cases is Arthur J. Gonzalez, Conflicts of Interest and Other Ethical Issues Facing Bankruptcy Lawyers: Is Disinterestedness Necessary to Preserve the Integrity of the Bankruptcy System?
, 28 Hofstra L. Rev. 67 (1999). Fee Forfeitures for Violations
. 11 U.S.C. 328(c) provides that violations of bankruptcy conflict rules can result in fee forfeitures. These are discussed, and the cases are cited, at the page entitled, "Malpractice Liability/Fee Forfeitures." To go there, click here.
In In re Whitman
, 101 B.R. 37 (N.D. Ind. 1989) the court held
that the same lawyer could not represent the committee of unsecured
creditors and a secured creditor. However, the lawyer would be
permitted to drop one representation and continue in the other.
Recent Cases $13 Million Fee Forfeiture from Conflict. In re Congoleum Corp
(post May 2000)
., 03-51524 (D.N.J. Feb. 7, 2006). This is taken from the February 13, 2006, online edition of the New Jersey Law Journal. A bankruptcy judge ordered 45-lawyer Gilbert Heintz & Randolph LLP to forfeit some $13 million in fees for failure to disclose all its relationships to the various parties when it was retained as “special insurance counsel” for the debtor. The relationships are complex, and we will not go through them here. The lessons are clear enough. The case was on remand from the Third Circuit, In re Congoleum, 426 F.3d 675 (3d Cir. 2005). On the Role of Examiners. In re: Big Rivers Electric Corp
., 355 F.3d 415 (6th Cir. 2004). This is a very large Chapter 11 Bankruptcy proceeding. The bankruptcy court appointed an examiner, one of whose tasks was to see if he could resolve disputes among the creditors and other parties. The examiner, a lawyer, identified ways to enhance the estate, and, according to the court, he was successful. But, he secretly attempted to cut a deal with three creditors for a percentage of any recovery they might realize from the estate. Two creditors rebuffed his overture. A third ultimately agreed. The opinion (and the story) is a long one. The Sixth Circuit affirmed the district court’s ruling that the examiner must forfeit his entire fee of approximately $1 million. The opinion is a comprehensive discussion of the role and obligations of bankruptcy examiners, including, importantly, his/her obligation to remain “disinterested.” Differences between General Counsel under § 327(a) and Special Counsel under § 327(e). In re Running Horse, L.L.C
., 371 B.R. 446 (E.D. Cal. 2007). Debtor sought to retain Lawyer as “special counsel” to the estate under § 327(e) of the Bankruptcy Act. In this opinion the court denied the application. The court felt that the duties described for Lawyer were too close to those prescribed in § 327(a). Because that section requires that the lawyer be “disinterested,” and because Lawyer represented other parties involved, Lawyer was not qualified to serve in the designated role. [Note: the opinion is a pretty good description of the differences between lawyers acting as “general counsel” and “special counsel.”] Structuring Role as Counsel for Unsecured Creditors Committee to Avoid Conflict Claims. Exco Resources, Inc. v. Milbank, Tweed, Hadley & McCloy LLP (In re Enron Corp.)
, 2003 U.S. Dist. LEXIS 1442 (S.D.N.Y. February 3, 2003). Milbank was hired as counsel for the official Committee of Unsecured Creditors in the Enron bankruptcy. One of the creditors of the estate, Exco, moved to disqualify Milbank. The bankruptcy judge denied the motion, and in this opinion, the district judge affirmed. Exco predicated its motion on the many relationships Milbank had, and has, with entities having interests in Enron, Enron affiliates, and the Enron estate. The motion also claims that Milbank’s disclosures regarding these relationships were not adequate. These relationships are too complex to detail here. In denying the motion, the court did an analysis of the disclosure requirements of Bankruptcy Rule 2014(a), and the conflict-of-interest provisions of 11 U.S.C. §§ 101, 327, 328 & 1103. The court also approved of a system using “ethical walls” and conflicts counsel to monitor situations that might require employment of other counsel. For a similar analysis regarding debtor’s counsel, see In re Washington Mut., Inc., 2011 Bankr. LEXIS 56 (D. Del. Jan. 7, 2011). However, in In re Project Orange Associates, LLC, No. 10-12307 (MG) (S.D.N.Y. June 23, 2010), the court rejected the conflicts counsel approach because of the importance of the creditor in question to the resolution of the bankruptcy.
Ronald D. Rotunda, Resolving Client Conflicts by Hiring "Conflicts Counsel,"
62 Hastings L.J. 677 (2011). Debtor's Counsel: What if Clients Are Creditors?
ABCNY Op. 2005-1 (Jan. 2005). This opinion deals with pro bono representation of individuals filing Chapter 7 proceedings. The interesting conflict-of-interest discussion is whether a lawyer can do this if several of his other clients are listed as creditors. The opinion says this is not a conflict unless and until the creditor takes some action in the case, such as objecting to the debtor’s discharge. Debtor's Counsel Taking Stock in Lieu of Fee. In re: ALTA+CAST, LLC,
2004 Bankr. LEXIS 222 (March 2, 2004). In this Chapter 11 proceeding the debtor did not have enough cash to pay debtor’s counsel. Debtor’s counsel agreed to take stock in the debtor as part of his fee. The court held that this arrangement did not render debtor’s counsel not disinterested. Debtor's Counsel Denied Fees for Failure to Disclose Intent to Invest in Debtor. In re West Delta Oil Co., Inc., Debtor,
432 F.3d 347 (5th Cir. 2005). Debtor’s special counsel had, at some point, considered being part of an investor group to put money into debtor. That apparently never happened. They did not disclose this relationship to the court when they were retained to represent the debtor. Nevertheless, and over the objection of one of the parties, the Bankruptcy Court allowed their fees. The district judge affirmed, pointing out that a conflict does not mandate denial of fees and that the Bankruptcy Court did not abuse its discretion in allowing the fees. In this opinion the Fifth Circuit reversed. The opinion contains a lengthy analysis of the conflict rules as they apply to debtor’s counsel. Lawyer Taking Real Estate in Lieu of a Fee Just Prior to Filing. In re Wentzell
, 656 N.W.2d 402 (Minn. 2003). Lawyer disciplinary proceeding. Just prior to his client’s filing for bankruptcy, the lawyer had the client convey property to the lawyer in payment of fees the client owed the lawyer. The lawyer was disciplined because his disclosures to the bankruptcy court were inadequate and because of misstatements the lawyer made in connection with the conveyance. [Note: we have been asked by law firms about taking real estate from nearly-insolvent clients in payment of fees. While it certainly may be possible, it should be done extremely carefully, with due regard for the law of preferences, fraudulent conveyances, and the bankruptcy disclosure rules for conflicts of interest.] Lawyer/Creditor May not Represent Chapter 12 Debtor. In re Brown
, 354 B.R. 535 (N.D. Okl. 2006). In re Development Corp. of Plymouth
, 283 B.R. 464 (E.D. Mich. 2002). A law firm represented party A in suing Party B and obtained a $2.4 million verdict on behalf of A. B filed a Chapter 7 bankruptcy proceeding. The trustee for B's bankruptcy estate applied to retain A's law firm to represent the trustee in pursuing actions against various defendants. Parties to the bankruptcy objected, claiming the law firm had a conflict under 11 U.S.C. § 327(a). The court approved the firm's retention saying that the firm's interest in collecting A's judgment was entirely consistent with the trustee's attempts to enhance the estate via the new suits. In re Pillowtex
, 304 F.3d 246 (3d Cir. 2002). The district court had approved retention of debtor’s counsel over the objection of the U.S. Trustee. The debtor had paid the law firm about $1 million in fees, in several installments, within the 90 days prior to the bankruptcy filing. The Trustee claimed that at least some of the payments were avoidable preferences and that the law firm could not claim that it was “disinterested.” The law firm proposed that the district court approve its retention on condition that if any payments were later proved to be preferential, the law firm would reimburse the estate. The Third Circuit reversed the district court and remanded for a determination whether, in fact, any of the payments were preferential. Incomplete Affidavit under Rule 2014 not Cured by other Filings. In re Jennings
, 2006 U.S. App. LEXIS 24746 (11th Cir. Oct. 4, 2006). In re Pittsburgh Corning Corp., Debtor,
308 B.R. 716 (W.D. Pa. 2004). This was an opinion and order denying an application to appoint a law firm as special counsel to a creditors’ committee. The relationships are complex and not worth detailing here. Suffice it to say, it is a wide-ranging discussion of the law dealing with law firms that may be perceived to be changing sides in the context of insurance representations. Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney
, LLP, 347 B.R. 679 (B.A.P. 9th Cir. 2006). The court found that trustee’s counsel was not disinterested because the debtors had earlier interviewed the law firm about representing them. ICM Notes , Ltd. v. Andrews & Kurth, L.L.P
., 278 B.R. 117 (S.D. Tex. 2002). Andrews & Kurth represented the debtor in possession. ICM Notes was formed to purchase notes held by a creditor, NationsBank. NewCorp was formed to purchase certain assets of the debtor in possession. Andrews & Kurth made certain demands regarding funds for administrative expenses, and the sale never occurred. ICM Notes sued Andrews & Kurth for breach of fiduciary duty to it and for tortious interference with the sale contract. Andrews & Kurth moved for summary judgment. After a lengthy analysis the court held that counsel for the debtor in possession can owe no fiduciary duty to a specific creditor and granted that part of the motion. The court held that there was some evidence to support the tortious interference claim and allowed it to stand. Stanley v. Keravision, Inc. (In re Keravision, Inc.)
, 273 B.R. 614 (N.D. Cal. 2002). The court held that a law firm could serve as debtor’s counsel even though one of the partners had been the bankrupt’s corporate secretary until three months before the filing. The court held that the law firm was not thereby “not disinterested,” within the meaning of 11 U.S.C. § 327(a). In re Andover Togs, Inc
., 2001 U.S. Dist. LEXIS 2690 (S.D.N.Y. 2001). This case involves whether the Debtor can hire an accounting firm. Of the three issues, two would also apply to lawyers. The accounting firm was an unsecured creditor of the Debtor for pre-petition work. The Debtor sought to retain the accounting firm to complete an audit it had already begun, relying upon 11 U.S.C. §§ 327(e), 105(a) & 1107(b). The court said no. First, the court held 11 U.S.C. § 327(e) applies only to lawyers, not to accountants. Second, the court held that the Debtor could not rely on the catchall provisions of 11 U.S.C. § 105(a), because 11 U.S.C. § 327(e) is "specific and unambiguous." Last, the court held that no professional could be hired pursuant to 11 U.S.C. § 1107(b), if the professional was "not disinterested." An unsecured creditor is not disinterested. See KLM, below. In re Doctors Hospital of Hyde Park, Inc
., 2001 U.S. Dist. LEXIS 2051 (E.D. Ill. 2001). Unsecured creditors committee sought to employ American Express as accountants and financial advisors. Among other things, they were to consult regarding a possible claim against a physician. The physician objected to the retention of American Express, because a low-level accountant at American Express had once worked on the physician's tax returns. When American Express found out about this relationship, it erected a screen around the accountant. The court overruled the objection and allowed the retention of American Express. The court cited only one case, In re Capen Wholesale
, 184 B.R. 547 (N.D. Ill. 1995), in which the court refused to disqualify a lawyer under similar circumstances. In re Water's Edge Limited Partnership
, 251 B.R. 1 (D. Mass. 2000). The court allowed a law firm to represent the debtor in possession even though the law firm had earlier briefly represented an individual who had attempted to gain control of the debtor in possession. In re LKM Industries, Inc
., 252 B.R. 589 (D. Mass. 2000). The court held that the debtor in possession could not hire an accountant who was a creditor of the estate by virtue of his pre-petition work for the debtor. The court said:
I conclude that § 1107(b) excludes only previous employment, and not a debt arising therefrom, as cause per se for disqualification. . . By virtue of the debt [the accountant] is a creditor and therefore not a disinterested person.
To the same effect is In re PHP Healthcare Corp
., 2002 Bankr. LEXIS 449 (D. Del. May 7, 2002). Kittay v. Kornstein
, 230 F.3d 531 (2d Cir. 2000). This case dealt with a conflict not unique to the bankruptcy practice. A special counsel for the debtor also represented a party ("Party X") in a completely different matter seeking to recover substantial funds from a person and entity that the debtor also had a claim against. The court resolved the conflict by ordering any recovery from Party X to be paid into escrow in the bankruptcy court, where the court ruled it would apportion the proceeds between the bankruptcy estate and Party X. The case is discussed in more detail at "Current Client - Direct Adversity." To go there, click here. Seibers v. Pepsi-Cola Bottling Co
., 2000 Tenn. App. LEXIS 818 (Tenn. App. December 21, 2000). Jared represented Seibers in a personal injury claim against Pepsi-Cola. At the same time he filed a proof of claim on behalf of a creditor of Seibers in Seibers' Chapter 13 proceeding. Jared later made a fee claim against Seibers. Seibers claimed that Jared had had a conflict of interest and that denial of the fee should be the penalty. The court held that Jared did have a conflict, but allowed Jared to collect the fee. The court based its holding on Seibers' delay in raising the conflict and his inability to show how the conflict hurt him. Sanctions for Conflict. In Re Kujawa
, 256 B.R. 598 (8th Cir. 2000). A lawyer appeared for creditors in a bankruptcy proceeding in which the lawyer's client was the debtor. The debtor successfully moved to disqualify the lawyer. The Bankruptcy Court awarded fees to the debtor of $65,000 (cost of the disqualification battle) and an addition sanction against the lawyer of $100,000. The District Court affirmed. The Bankruptcy Panel of the Eighth Circuit affirmed, saying that the sanction was appropriate under the court's inherent power to punish lawyers. The opinion does not say whether the court treated the matter as one involving a current client or former client. The court mentions neither Rule 1.7, which deals with current clients, nor Rule 1.9, which deals with former clients. In re Von Behren Electric, Inc
., 2002 Bankr. LEXIS 1463 (C.D. Ill. December 23, 2002). The court denied compensation to debtor’s counsel because he had begun putting the interests of the debtor’s principals over that of the debtor. The court reached that conclusion because debtor’s counsel admitted billing some time separately to the debtor’s principals. The opinion does not specify what debtor’s counsel did to favor the principals. [According to the local newspaper, the Trustee reported to the court that the debtor’s principals may have diverted company funds and property to themselves just prior to the bankruptcy filing. Also, according to article, debtor’s counsel was denying the allegations on behalf of the principals. Natalie Morris, Criminal Investigation Possible for Von Behrens, The State-Journal Register (Springfield, Ill.), Nov. 4, 2002.] Failure to Disclose “No Litigation” Exception in Waiver. In re Jore Corp
., 298 B.R. 703 (D. Mont. 2003). Law Firm represented Debtor. Law Firm also represented Debtor’s principal creditor in unrelated matters, which Law Firm disclosed to the court pursuant to Rule 2014(a). What Law Firm did not disclose was that the conflicts waiver it obtained from its creditor client had a “no litigation” exception. Belatedly, after a dispute erupted between the creditor and Law Firm in this case, Law Firm mentioned the “no litigation” exception in a court filing. The bankruptcy court in this opinion ordered Law Firm disqualified and ordered disgorgement of all fees and almost all expenses. Creditors' Committee Allowed to Sue Derivatively. In re Cybergenics Corp
., 330 F.3d 548 (3d Cir. 2003). The court held that a creditors' committee could bring fraudulent conveyance proceedings for the estate where the debtor in possession declined to do so. The court distinguished Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000), which disallowed such an action in a Chapter 7 case. The court noted that both the Second and Seventh Circuits have reached the same result. In re Gutierrez
, 309 B.R. 488 (W.D. Tex. 2004). The entire thrust of the opinion is captured by the following paragraph:
For all of the foregoing reasons, the court finds that the attorney who has represented a debtor in a prior chapter 13 case will not be disqualified from representing the debtor in a subsequent case simply by virtue of the existence and assertion of a claim for unpaid fees from the previous case. The state bar rules do not impose such a per se rule, and, even if such a per se rule could be divined from section 327(a), it would not apply in the chapter 13 context because section 327(a) does not control the retention of debtor's counsel in a chapter 13 case.?
Lawyer May Represent Estate and Creditor Where Conflict not "Actual."
In re Johnson, 312 B.R. 810 (E.D. Va. 2004). Law Firm represented a creditor in this bankruptcy case. The trustee then sought, and obtained, leave to retain Law Firm as special counsel. Later, over objection, the Bankruptcy Court granted Law Firm's fee petition for work done for the estate. In this opinion the district judge affirmed, holding that a lawyer for the debtor and for a creditor does not necessarily have an "actual" conflict of interest. The court noted that here there was not an actual conflict because Law Firm's interest, both on behalf of the estate and the creditor/client, was to maximize the value of the estate. Just Plain Ugly Conflict. In re Gary Mercury, Debtor
, 2004 U.S. App. LEXIS 25481 (2d Cir. Dec. 10, 2004). This was the denial of fees to a law firm based upon a conflict of interest. The court laid out the basis for the denial eloquently, as follows:
It is undisputed that the Fellows firm (1) advised the Mercurys to enter Chapter 7, (2) advised the Mercurys to engage in mediation of their personal injury claim, (3) reassured the Mercurys that they would not be bound by the result of the mediation, (4) informed the Mercurys only after the mediation that they could, in fact, be bound by its result because the Chapter 7 trustee was in control of their claim, and (5) recommended to the trustee that she accept the settlement proposed by the mediator and accepted by the insurer over the Mercurys' objection. As the bankruptcy court pointed out, the firm confuses the duty it had to its clients with some imagined duty it believed it had to the claim. See In re Mercury, 280 B.R. 35, 61 (Bankr. S.D.N.Y. 2002). Recognizing that the Mercurys did not wish to accept the proposed settlement, the firm was obligated either to oppose the trustee's effort to secure court approval of the settlement, or to seek to withdraw from the matter altogether.?
Lousy Application to Become Debtor's Counsel. In re EZ Links Golf, LLC, Debtor
, 2004 Bankr. LEXIS 1956 (D. Col. Dec. 6, 2004). This is a Chapter 11 case involving the appointment of debtor’s counsel. The opinion has no precedential value, but may have some educational value. The debtor’s sole owner was Corporation A. Corporation B owns 80% of the Corporation A. An individual, X, owns 50% of Corporation B. X is the sole beneficiary of a family trust, which owns a bank. The bank holds a $1.1 million note from debtor. Moreover, in 2002 the debtor conveyed all its assets to Corporation A. A law firm that represented various of the foregoing interests sought to be appointed debtor’s counsel. The law firm’s initial application was pathetically deficient in identifying these relationships. When the court became aware of some of these deficiencies, it ordered the law firm to file an amended application. The amended application, while better, was still pretty bad. As a result, the court denied the law firm’s application to be debtor’s counsel. In re Coal River Resources, Inc
., 321 B.R. 184 (W.D. Va. 2005). Four corporations, all owned and controlled by the same person, are being administered jointly in this Chapter 11 proceeding. All four petitioned the court for leave to hire the same law firm as debtor’s counsel. The court affirmed the Bankruptcy Court’s ruling that the law firm could represent just two of the companies. This was because various of the companies owed others substantial amounts of money and because of substantial inconsistencies in the way each company accounted for these debts. In re R&R Associates of Hampton
, 402 F.3d 257 (1st Cir. 2005). The Chapter 7 trustee of Debtor, R&R, brought a malpractice action against the law firm that had previously represented R&R in the preceding Chapter 11 proceeding. R&R had two individual general partners (“the partners). The law firm created family limited partnerships for the partners to assist the partners in avoiding creditors while at the same time petitioning the Bankruptcy Court for leave to be Debtor’s Counsel. The law firm claimed it had no conflicts of interest and that it was “disinterested.” The law firm did not disclose the work it had done, and was doing, for the partners. The district court held that the law firm was not liable to the Chapter 7 estate. The First Circuit reversed outright, holding that the law firm should have been pursuing R&R’s contribution rights against the partners, that the law firm’s conflicts constituted breaches of fiduciary duty, and that the law firm was liable to R&R under New Hampshire state law. The court also found outright that the damages were $412,000. When Law Firm Ineligible to be Debtor's Counsel Can Be Debtor's "Special Counsel." In re Woodworkers Warehouse, Inc
., 323 B.R. 403 (D. Del. 2005). The Bankruptcy Court had disqualified Law Firm from being Debtor’s Counsel in this proceeding. Subsequently, the Debtor moved to have Law Firm appointed “special counsel” for the purpose of conducting tasks such as:
(1) obtaining court approval for the use of its cash collateral, (2) selling assets through a "going out of business sale" and disposing of related executory contracts, and (3) preparing and negotiating the Debtor's key employee retention program and providing payment to critical personnel of the Debtor.
The United States Trustee objected, claiming that appointing Law Firm for these purposes would be a circumvention of the order denying Law Firm the status of Debtor’s Counsel. The court overruled the objection finding that Law Firm’s functions would not constitute “conducting the case” within the meaning of Section 327(e) of the Bankruptcy Code. Appealability of Order Approving Appointment of Special Counsel. In re M.T.G., Inc
., 403 F.3d 410 (6th Cir. 2005). Chapter 7. The bankruptcy judge denied the trustee’s application to employ a lawyer as special counsel. The district judge reversed the denial and sent the matter back to the bankruptcy judge. A former trustee filed this appeal. The Sixth Circuit in this opinion held that the district judge’s order was interlocutory and not of the sort of interlocutory order that can be appealed as of right. In re Big Mac Marine, Inc
., 326 B.R. 150 (8th Cir. Bankr. App. Panel 2005). Individuals A and B owned the stock in Co. C. A and B filed a Chapter 11 proceeding for themselves, with Lawyer X as debtors’ counsel. This is a separate proceeding involving Co. C as debtor. Lawyer X attempted to be approved as debtor’s counsel for Co. C in this proceeding. However, because A and B were Co. C’s largest creditor, the district court and this court held that X was not disinterested and had a conflict. The court reasoned that in the A and B proceeding, A and B, represented by X, would be trying to maximize their recovery from Co. C in this proceeding. Yet, debtor’s counsel in this proceeding would be charged with evaluating claims and seeing that all creditors were treated fairly. This, the court held, X could not do. Representing Driver and Passengers in Injury Case Results in Fee Denial. In re Bruno
, 327 B.R. 104 (E.D.N.Y. 2005). A, B, and C were passengers in a car driven by D. They had an accident. Law Firm X filed an action on behalf of A, B, C, and D. A then filed a Chapter 7 bankruptcy. The trustee filed an application to retain Firm X to represent the bankruptcy estate in the injury case. A member of Firm X filed an affidavit stating that Firm X did not have a conflict. On the eve of trial another member of Firm X wrote a letter to the court seeking leave to withdraw from representing the estate because Firm X had a conflict. Firm X was immediately replaced with Firm Y. Firm Y tried the case, and before the jury came in with a verdict, Firm Y negotiated a settlement on behalf of the estate. The trustee made a motion to pay the full contingent fee to Firm Y. Firm X objected claiming it should get most of the fee. The court allowed Firm Y to receive the full fee. The court found that Firm X had a conflict in representing the driver and the passengers, that Firm X did not obtain a knowing waiver of the conflict, and that the Firm violated Bankruptcy Rule 2014 in not disclosing the representation of the driver when Firm X was retained by the estate. Failure to Disclose Conflicts Cause Partial Fee Forfeiture for Debtor's Counsel and for Creditors' Committee Counsel. In re EToys, Inc
., 331 B.R. 176 (D. Del. 2005). Representing Multiple Debtors and Inter-Debtor Disputes. In re Adelphia Communications Corp
., 336 B.R. 610 (S.D.N.Y. 2006). Law Firm represented 231 debtors, all related to Adelphia, in this Chapter 11 proceeding. Certain creditors moved to disqualify Law Firm from representing certain of the debtors and any debtors in any inter-debtor disputes. The Bankruptcy Court held that Law Firm would have to step aside during resolution of inter-debtor disputes. The district judge affirmed at In re Adelphia Communications Corp., 342 B.R. 122 (S.D.N.Y. 2006). Can't Represent First Lien Creditors in Chapter 11 if Represented Second Lien Creditor Pre-Petition. In re Meridian Automotive Systems-Composite Operations, Inc
., 340 B.R. 740 (D. Del. 2006). Law Firm did work for Creditor A in part to protect Creditor A’s second lien status with Meridian, ultimately the Debtor in Possession in this bankruptcy proceeding. Before the bankruptcy, Creditor A stopped using Law Firm. During the bankruptcy an informal committee of first lien creditors (“Committee”) hired Law Firm to assist Committee in the bankruptcy. Creditor A moved to disqualify Law Firm, and in this opinion the Bankruptcy Judge granted the motion. The opinion contains a lengthy discussion of the “substantial relationship” test, but the crux of the court’s reasoning is this sentence:
The legal advice which [Law Firm] is now providing to the [Committee] concerns the same intercreditor issues, only this time [Law Firm] is advising the first lien creditors how to protect themselves from the second lien creditors, including [Creditor A, Law Firm’s former client].
In re Contractor Tech., LTD
, 2006 U.S. Dist. LEXIS 34466 (S.D. Tex. May 30, 2006). Chapter 7. The trustee sought to hire Law Firm as special counsel to investigate and prosecute avoidance claims against creditors. Law Firm represented eight of the 400 creditors of the estate. For that reason the largest creditor of the estate objected to the hiring of Law Firm. The bankruptcy judge approved Law Firm, but provided that Law Firm was not to be involved in investigating or prosecuting avoidance claims against any of its eight clients. The record also reflected that, with near certainty, no post-petition payments had been made to any of the eight clients. On appeal the district judge sustained the bankruptcy judge’s order, holding that Law Firm had no “actual” conflict of interest and that it was disinterested. Harrington v. Kapila
, 2006 U.S. Dist. LEXIS 87133 (S.D. Fla. Nov. 30, 2006). Lawyer represented Debtor when Debtor filed a Chapter 11 bankruptcy and continued to represent Debtor while in Chapter 11. Later Lawyer filed for Debtor a Chapter 7 petition. When that was granted, Trustee was appointed and hired another law firm. When Trustee filed an adversary proceeding against Debtor’s 60-percent shareholder, Lawyer appeared for the shareholder. Trustee moved to disqualify Lawyer, and the court, in this opinion, granted the motion, using a standard Rule 1.9 analysis. Conflict Resulting from Defective Pre-petition Opinion Letter. In re SonicBlue, Inc
., 2007 Bankr. LEXIS 1057 (N.D. Cal. March 26, 2007). This is a brief summary of a very complex case. In this rather harsh opinion the bankruptcy judge ordered debtor’s counsel (“Law Firm“) disqualified. For some years Law Firm had represented debtor in numerous pre-petition matters. One matter was debtor’s issuance of notes to several investors. In the third-party opinion to the investors Law Firm had omitted the bankruptcy exception from part of the remedies opinion. Post-petition the investors threatened to sue Law Firm if they failed to recover all their investments. Law Firm failed to notify the court of the original transaction or the investors’ threat. The U.S. Trustee moved to have the firm disqualified, and the court granted the motion. The conflict was that the law firm found itself in the position of evaluating claims, knowing that if the claims of the investors were allowed, the law firm’s exposure to the investors would be reduced. The court held the “disgorgement of fees” issue for a later date. Good Discussion of Fraud on the Court, which Led to Vacating Several Orders Favorable to Secured Creditor. In re M.T.G., Inc.
, 366 B.R. 730 (E.D. Mich. 2007). Lawyer for Debtors' Children's Spendthrift Trusts Could Also Be Debtors' Counsel. In re Marble
, 2007 Bankr. LEXIS 1743 (N.D. Tex. May 25, 2007). The debtors-in-possession in this Chapter 11 proceeding sought to employ Law Firm as debtors‘ counsel. The United States Trustee objected because Law Firm represented spendthrift trusts set up by debtors for their children. The court could not find a conflict and granted the debtors’ petition “without prejudice” to the rights of any creditor to raise any conflict that might arise in the future. In re The Brown Schools
, 368 B.R. 394 (D. Del. 2007). This opinion dealt with a motion to dismiss, so we should not make too much of it at this stage. Nevertheless, it is illustrative of what a bankruptcy trustee can allege against the former law firm for the debtor. The claims here included breach of fiduciary duty (motion denied), aiding and abetting a breach of fiduciary duty (motion granted with leave to replead), aiding and abetting a fraudulent transfer (motion granted with leave to replead), deepening insolvency (motion denied pending further developments in the Delaware courts), civil conspiracy (motion granted with leave to replead), and a declaratory finding that the law firm’s claim for fees should be subordinated (motion granted - no mention of repleading). As to deepening insolvency the bankruptcy judge said that the opinion in Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P
., 906 A.2d 168 (Del. Ch. 2006), was “well reasoned,” but she denied the motion pending a decision by the Delaware Supreme Court. Discussion of "Potential" vs. "Actual" Conflicts. In re Hammer
, BAP No. WW-06-1373-MoDJ, (9th Cir. Bankr. Appeals Panel Aug. 17, 2007). This is a fact-intensive matter, in which a law firm attempted to be debtor’s counsel while at the same time representing a city, which had claims against the debtor, and against which the debtor might have a claim. The law firm had been sloppy in its conflicts checking and in complying with its disclosure obligations to the court. The court discussed the “potential” versus “actual” conflict dichotomy recognized by some courts and concluded that it is really a question of semantics. Either the law firm might be influenced by its dual relationship or not, depending upon the facts. Upon remand to the district court the Panel ordered the district court to determine periods for which fees must be denied and to determine whether the law firm can continue as debtor’s counsel. [Note: anyone having trouble retrieving the opinion online should send an E-mail to firstname.lastname@example.org, and we will send a PDF.] Partial Fee Forfeiture for Failure to Disclose Relationships. In re Matco Electronics Group, Inc
., 2008 WL 141908 (N.D.N.Y. Jan. 11, 2008). In an application to be counsel to creditors’ committee Law Firm failed to disclose that a lawyer in Law Firm (“Lawyer”) was the son-in-law of the CEO and President of a major creditor of the estate. After Law Firm’s appointment Lawyer’s wife became in-house counsel to that same creditor. As a result of the failure to disclose the court, in this opinion, ordered that Law Firm forfeit a portion of its fees. Tenth Circuit's Approach to § 327(a) and Rule 2014
. In re Harwell
, 2008 U.S. Dist. LEXIS 9629 (D. Col. Jan. 25, 2008). Bankruptcy. Debtor objected to Lawyer’s appointment as counsel to the Chapter 7 trustee. In this opinion the district judge affirmed the bankruptcy judge’s overruling the objection. The merits are trifling, but the opinion contains a nice discussion of how the Tenth Circuit deals with § 327(a) of the Bankruptcy Act and Rule 2014 of the Federal Rules of Bankruptcy Procedure. Trustee Could Hire Special Counsel who Represented Creditors when the Estate Has Interests Identical to the Creditors. In re Winterville Marine Services, Inc
., 2008 Bankr. LEXIS 1112 (N.D. Miss. April 16, 2008). Chapter 7 bankruptcy. Trustee sought to employ Law Firm as special counsel pursuant to §327(a) of the Bankruptcy Act to bring an adversary action against other parties. Several parties objected because Law Firm represented several creditors of the estate. The court approved the appointment because the interests of the estate and Law Firm’s other clients were identical. Another Special Counsel Case. In re Buffalo Coal Co
., 2008 Bankr. LEXIS 1259 (N.D. W. Va. April 30, 2008). Chapter 7 trustee sought to retain Law Firm for the purpose of suing VEPCO. While this proceeding was under Chapter 11, Law Firm represented the creditors’ committee. VEPCO was a member of the committee. Several parties objected to retention of Law Firm because of this relationship. After a confusing discussion of Bankruptcy Act § 327(a), (c), & (e), the court allowed the retention. Among other things, the court said that Law Firm’s representation of the creditors’ committee was not tantamount to representation of VEPCO. The court also said that any information Law Firm may have obtained from VEPCO while representing the creditors’ committee would eventually come to light in the case between the debtor and VEPCO. In re Tri-State Financial, LLC
, 2008 U.S. App. LEXIS 10236 (8th Cir. May 13, 2008). In this opinion the court held that, under §327(c) of the Bankruptcy Act, the trustee could retain a lawyer who represented a creditor if the representation was disclosed and if any dispute that arose between the estate and that creditor was handled by a different lawyer. In re Buffalo Coal Co.
, 2008 Bankr. LEXIS 1259 (N.D. W. Va. April 30, 2008). Chapter 7 trustee sought to retain Law Firm for the purpose of suing VEPCO. While this proceeding was under Chapter 11, Law Firm represented the creditors’ committee. VEPCO was a member of the committee. Several parties objected to retention of Law Firm because of this relationship. After a confusing discussion of Bankruptcy Act § 327(a), (c), & (e), the court allowed the retention. Among other things, the court said that Law Firm’s representation of the creditors’ committee was not tantamount to representation of VEPCO. The court also said that any information Law Firm may have obtained from VEPCO while representing the creditors’ committee would eventually come to light in the case between the debtor and VEPCO. In re El Comandante Mg'mt Co., LLC
, 2008 U.S. Dist. LEXIS 69696 (D.P.R. Sept. 2, 2008). This is a proceeding to determine whether debtor's counsel ("Law Firm") should be denied fees because of its alleged conflict of interest (not being disinterested). Bank was an important client of Law Firm on matters not related to this bankruptcy. In October 2004 Bank made a commitment to provide financing to Company so Company could buy the debtor's assets. When the asset purchase took place in January 2007 Law Firm withdrew as debtor's counsel, disclosing for the first time on the record that Law Firm represented Bank on other matters. The objector to Law Firm's fees claimed that Law Firm should have made the disclosure when Bank made the loan commitment in October 2004. The bankruptcy judge allowed the fees. A magistrate judge ruled that the bankruptcy judge should be affirmed. In this opinion the district judge agreed holding that Bank's merely making a financing commitment to a party to enable the future sale of the debtor's assets was not enough adversity to trigger Law Firm's disclosure obligation. Honarkar v. GSM Wireless, Inc
., 2008 U.S. Dist. LEXIS 72840 (C.D. Cal. Sept. 22, 2008). In this Chapter 11 proceeding the debtor sought to hire Law Firm as special counsel to handle three discreet matters that debtor's counsel was not equipped to handle. Law Firm had a lawyer-client relationship with Cingular on matters unrelated to this proceeding. Cingular was a major creditor and business partner with the debtor; however, the matters for which Law Firm was being hired as special counsel did not relate to Cingular's claims against the estate. Law Firm did defend the debtor in a case in which the debtor and Cingular were co-defendants, and in which the debtor and Cingular were not adverse. Over objections of one of the parties the bankruptcy court granted permission to hire Law Firm and approved fees incurred prior to the request. There were also issues about the lateness of the application and the fact that Law Firm had done substantial work before the application was filed. Bankruptcy of Calogheros
, 2008 BCSC 1578 (CanLII) (S. Ct. of B.C. Nov. 17, 2008). This is an intense family squabble that led to the bankruptcy of one member of that family. Law Firm wound up representing the debtor and, at one time or another, representing several different members of the family, some of whom are also creditors. A further aggravating factor is that one of Law Firm's clients submitted false evidence. The various relationships and misconduct were too fact-intensive (and too petty) to be of value to this audience. Suffice it to say, the court found it all a bit much and disqualified Law Firm. Conflict and Fraud on Court. In re M.T.G., Inc
., 2009 U.S. Dist. LEXIS 3008 (E.D. Mich. Jan. 14, 2009). Shortly after being appointed trustee Lawyer agreed with a principal creditor ("Bank") to have his firm, for a fee, analyze and protect Bank's secured property. In subsequent proceedings involving orders benefiting Bank Lawyer failed to disclose to the court the agreement with Bank. Once the bankruptcy court became aware of Lawyer's relationship with Bank, it found that Lawyer had committed a fraud on the court, ordered Lawyer's fees forfeited, and ordered that the orders benefiting Bank be vacated. In this opinion the district judge affirmed the bankruptcy court. The opinion is a lengthy discussion of what must be shown to establish a fraud on the court. In re Campbell
, 2009 Ore. LEXIS 6 (Ore. Feb. 5, 2009). This case involves the discipline of Lawyer. Lawyer had represented a debtor in a Chapter 13 proceeding. It became a Chapter 7 proceeding. The new trustee hired Lawyer as special counsel to handle a dispute over security claims by several creditors. At the time of his appointment Lawyer was owed some $20,000 from his work for the debtor. The trustee settled one of the security claims, the terms of which Lawyer didn't like. So, Lawyer resigned as special counsel and commenced representing several other estate claimants in contesting the settlement. Disciplinary authorities determined that Lawyer should be suspended because of Lawyer's conflict. In this opinion the court affirmed and ordered Lawyer suspended for 60 days. (This was one of two unrelated charges against Lawyer.) The court held that serving as special counsel while being an administrative creditor was not a conflict. However, the court held that turning on the trustee over the settlement was a conflict. The court applied the older Oregon Code because the above conduct occurred before the new Oregon Rules were adopted. In re Restaurant Development Group, Inc
., 2009 Bankr. LEXIS 529 (N.D. Ill. Mr. 24, 2009). This is a Chapter 7 proceeding, in which the debtor is a restaurant company. Law Firm represented the debtor in its Chapter 7 filing and, evidently, continues as the debtor's counsel. The trustee, through his own counsel, has filed adversary proceeding against a number of companies and individuals, including the debtor's principals. Law Firm represents several of these persons and entities in the adversary proceedings. The bankruptcy judge raised, sua sponte, the issue of Law Firm's conflict. The trustee declined to pursue the issue. In this opinion the bankruptcy judge declined to disqualify Law Firm as to any of its representations relating to this case.
In re Jade Mgm't Services
, 2009 U.S. Dist. LEXIS 42863 (D.V.I. May 20, 2009). Of interest to this audience is the following holding:
This court finds that the balance of authorities as well as plain language of Section 328(c) give the Bankruptcy Division discretion to grant or deny compensation, even to an attorney who was not "disinterested" when appointed.?
Special Counsel's Failure to Disclose Relationships Fatal to Fee Application. In re Perez
, 2009 U.S. Dist. LEXIS 60511 (D. Col. July 7, 2009). When retained as special counsel, Lawyer did not disclose the fact that he was representing Debtor's husband and three companies owned by Debtor in a related state court proceeding. A creditor objected to Lawyer's fee application, and, in this opinion, the district judge affirmed the bankruptcy judge's order denying fees. The court noted that the denial was not because the state court representation was a conflict of interest, but because of the failure to disclose it. Both courts seemed offended that Lawyer also failed to disclose that the other defendants in state court were getting a "free ride" because Lawyer planned on being paid by the bankruptcy estate. In re Trafalgar Power Inc
., 2009 U.S. Dist. LEXIS 114770 (N.D.N.Y. Dec. 9, 2009). In ruling on a request to amend the fee agreement of debtor's special counsel the court noted that a conflict of interest does not necessarily result from the debtor's owner paying the fees of debtor's counsel. In re Raymond Professional Group, Inc
., 2009 Bankr. LEXIS 4031 (N.D. Ill. Dec. 17, 2009). This proceeding involves several related debtors. Among various disputes, one count of one action involves the claim of two of those debtors to a certain fund. One of those debtors was the wholly-owned subsidiary of the other. A creditor involved in that dispute moved to disqualify the law firm ("Law Firm") that was attempting to represent both debtors. In this opinion the bankruptcy judge disqualified Law Firm as to the one count in question, because Law Firm had an "actual conflict." The outcome was very fact-specific, so we hesitate to say much more about it. The opinion contains discussions of "actual" vs. "potential" conflicts, substantive consolidation, as well as other issues, with many references to Seventh Circuit and Northern District of Illinois cases. In re Polaroid Corp
., 2010 Bankr. LEXIS 146 (D. Minn. Jan. 22, 2010). The trustee in this Chapter 7 proceeding sought to employ Law Firm as special counsel to handle a finite matter. The trustee had hired another law firm as general counsel. Due to another of Law Firm's representations, several parties objected to Law Firm's retention. In this opinion the bankruptcy judge approved Law Firm's retention. The various relationships are complex, and we will not tackle them here. What should be of interest to this audience is the court's comparison of § 327(a) of the Bankruptcy Act to § 327(e). The former applies to general counsel of the trustee, while the latter applies to special counsel. In the words of the court § 327(e) imposes "fewer restrictions" on the proposed lawyer than does § 327(a). In re N. John Cunzolo Associates, Inc
., 2010 Bankr. LEXIS 444 (W.D. Pa. Feb. 23, 2010). This opinion was a ruling on a Chapter 11 Debtor's application for appointment of debtor's counsel. Pursuant to 11 U.S.C. § 327(a) the court held that the lawyer was not "disinterested" and denied the application. A starting point was that the lawyer also represented the principal of the debtor. Another problem was that, pre-filing, debtor had conveyed almost all of it tangible assets to the principal's relatives. That was not all. In any event, the court concluded by saying, "The taint is just too much." In re Nashville Senior Living, LLC
, 2010 Bankr. LEXIS 875 (6th Cir. B.A.P. April 1, 2010). In this opinion the Sixth Circuit Bankruptcy Appeals Panel ruled that an order denying appointment of counsel to the unsecured creditors' committee is not appealable as of right. In re M&M Marketing, L.L.C
., 2010 Bankr. LEXIS 866 (8th Cir. B.A.P. April 2, 2010). This case involves a motion by a creditor to remove a lawyer for the trustee ("Lawyer"). The bankruptcy court denied the motion, and in this opinion the Eighth Circuit Bankruptcy Appellate Panel reversed. The court discusses the juxtaposition of 11 U.S.C. § 327(a)&(e), and who qualifies for the position of "special counsel" under (e). The court also discusses how the representation of certain creditors can cause a lawyer not to be eligible to be debtor's counsel, including for limited purposes. The relationships among the various creditors, the debtor, and Lawyer are not well defined in the opinion, so not much more can be said about it here. In re Straughn
, 2010 Bankr. LEXIS 1323 (W.D. Pa. May 5, 2010). In these related Chapter 11 proceedings one of the debtors is a corporation, and the other is and individual who is the corporation's 80% shareholder. Both debtors sought leave to employ the same lawyer as debtor's counsel. In this opinion the bankruptcy judge denied leave. The court discussed those cases that held that having common counsel in this situation is never permissible versus those cases that have held that it is presumptively impermissible. The court noted that the Third Circuit falls into the latter category. Among other things, the court noted that the individual debtor is a creditor of the corporation. In re Universal Enterprises of W. Va
., 2010 Bankr. LEXIS 1721 (N.D. W. Va. June 9, 2010). Chapter 11. The debtor, owner of commercial real estate, applied to employ Lawyer. Lawyer represents an automobile dealer, which rents the debtor's real estate. The debtor and the dealer are owned by the same person. A creditor objected to Lawyer's retention by the debtor. In this opinion the bankruptcy judge granted the application. The court said the conflict alleged by the creditor was merely "potential," and thus not disqualifying. The court said that dealer's lease appeared to be in the best interests of the estate and that the debtor's and dealer's interests appear to be aligned. In re Jade Mgm't Services
, 2010 U.S. App. LEXIS 14125 (3d Cir. July 9, 2010). Debtor's Counsel also represented the debtor's sole shareholder. While the shareholder had guaranteed all of the debtor's secured debts, it was likely that the assets of the bankruptcy estate would satisfy the secured debts. After the shareholder sold her stock in the debtor to a purchaser, the purchaser objected to Debtor's Counsel application for fees, claiming that Debtor' Counsel should never have been retained because of a conflict with the shareholder. The bankruptcy judge and the district judge approved the fees, and in this opinion the appellate court affirmed. In discussing the difference between potential conflicts and actual conflicts, the court said that Debtor's Counsel's conflict was at most potential. This was because of the likelihood that the debtor's estate would cover the debtor's secured debts. In re SLM Trans, Inc
., 2010 U.S. Dist. LEXIS 69093 (S.D. Ill. July 12, 2010. Lawyer represented the debtor but sought leave to withdraw. The trustee objected, and the court denied leave. Lawyer then began representing parties in an adversary proceeding, taking positions that were detrimental to the estate. For this reason the bankruptcy judge granted the trustee's motion to have Lawyer disqualified in the adversary proceeding. The bankruptcy judge then vacated its earlier order denying Lawyer leave to withdraw as the debtor's counsel. In this opinion the district judge affirmed the bankruptcy judge's order disqualifying Lawyer in the adversary proceeding. This was because the trustee had not waived Lawyer's conflict pursuant to Illinois Rule 1.7. In re M&M Marketing, L.L.C
., 2010 U.S. App. 21751 (8th Cir. Oct. 20, 2010). In this one-paragraph opinion the court affirmed the Bankruptcy Appellate Panel's decision to disqualify the lawyer for the trustee. First, the court held that the lawyer could not be "special purpose" counsel under 11 U.S.C. § 327(e), because the lawyer had not previously represented the debtor. Second, the court held that the lawyer had a conflict because he was currently representing creditors of the estate with interests adverse to the estate. In re Connolly North America, LLC
, 2010 U.S. Dist. LEXIS 123368 (E.D. Mich. Nov. 22, 2010). In this Chapter 7 proceeding creditors moved to disqualify the trustee because the trustee had breached his fiduciary duty to the estate. Among other things, the trustee allegedly did not pursue, or at least did not investigate, claims against himself and his own law firm for things they did, or may have done, to disadvantage the estate. The bankruptcy judge granted the motion. In this opinion the district judge affirmed. The issue was whether the trustee's obvious conflict was "cause" for removal under 11 U.S.C. § 324(a). In re JMK Construction Group, Ltd
., 2010 Bankr. LEXIS 4352 (S.D.N.Y. Dec. 9, 2010). Law Firm applied to represent multiple related debtors. In this fact-intensive analysis the bankruptcy judge denied the application, primarily because the various debtors had potential claims against each other. Moreover, the court followed other cases holding that conflicts under section 327(a) of the Bankruptcy Act could not be waived. The opinion is a decent research tool for cases involving the representation in bankruptcy proceedings of multiple parties with potential claims against each other. In re Sarao
, 2011 Bankr. LEXIS 333 (D. Mass. Feb. 1, 2011). Chapter 7. The trustee sought leave under 11 U.S.C.S. § 327(c) to employ Lawyer as special counsel to handle adversary proceeding against the debtor's father. The father objected because Lawyer also represented the debtor's largest creditor, Merrill Lynch, and Merrill Lynch was to pay Lawyer's fees in the adversary litigation. The court granted leave, but held that Merrill Lynch could not direct the litigation, only the trustee. In the case certain conflicts arose, Lawyer would have to withdraw. If Merrill Lynch chose not to continue funding the litigation, Lawyer could not withdraw. In re Age Refining, Inc
., 2011 Bankr. LEXIS 594 (W.D. Tex. Feb. 22, 2011). In this 19-page opinion a bankruptcy judge approved the retention by the Chapter 11 trustee of two law firms to bring preference and fraudulent transfer claims against certain companies. The opinion includes a lengthy discussion of the following sections of the Bankruptcy Act and how they relate: 101, 327, 328, 330, 503, & 504. The court was not concerned that the two firms' work would be duplicative, because the court reserved the power to adjust their fees accordingly. The court held that a provision awarding each firm a 3% contingent fee was not feel splitting prohibited by the Act. The contingent fee would be on top of the firms' billing at 85% of their normal rates. One of the firms was regular counsel to the Chapter 11 trustee; the other was counsel to the Creditors' Committee. The court found that these relationships did not run afoul of the adverse interest or disinterestedness provisions of Section 327(a). Waldron v. Adams and Reese, LLP,
2011 U.S. Dist. LEXIS 45877 (W.D. La. April 27, 2011). Law Firm, while representing Debtor in this Chapter 11 proceeding, received $200,000 from Debtor's principal creditor, in partial payment of Law Firm's fees for representing Debtor. In this opinion the district judge affirmed the bankruptcy judge's finding that the payment did not render Law Firm "not disinterested." The district judge also affirmed the bankruptcy judge's ruling that Law Firm should disgorge $135,000, about 20% of its total fees, for failure to disclose the $200,000 payment to the court. In re Heritage Land, LLC
, 2011 Bankr. LEXIS 2945 (D. Md. July 28, 2011). In this opinion the bankruptcy judge held that a law firm for the debtors was not entitled to fees because it had also represented the principal unsecured creditor of the estate in other litigation. Estate,Re Kobe Real Estate, LLC
, 2011 Bankr. LEXIS 3266 (D.S.C. Aug. 31, 2011). Application by Debtor for retention of counsel in Chapter 11 case. The bankruptcy judge denied the application because of a number of "fast and loose" (our phrase) exchanges of money among the bankrupt, its owners, and the lawyer Debtor sought to retain. Very fact-specific, but just did not pass the smell test. Jacques H. Geisenberger, Jr., P.C. v. DeAngelis
, 2011 U.S. Dist. LEXIS 108916 (M.D. Pa. Sept. 23, 2011). In this opinion the district judge affirmed the bankruptcy judge's order disqualifying Debtor's counsel ("Lawyer"). The disqualification was largely due to Lawyer's failure to disclose his pre-petition relationships and compensation. However, there was another feature. Before the bankruptcy, Lawyer had handled for Debtor the sale of stock but had failed to comply with federal and state securities laws. That resulted in litigation between the buyer and Debtor. That litigation was pending when the bankruptcy was filed and Lawyer's appointment as Debtor's counsel was approved. The court found that to be a conflict because Lawyer could not have given Debtor objective advice about the buyer's claim given Lawyer's intimate involvement in the sale. In re Everest Crossing
, LLC, 2011 Bankr. LEXIS 3561 (D. Mass. Sept. 16, 2011). Debtor's counsel's fee request reduced by half (to $100,000) for failure, when retained, to disclose certain relationships and misrepresenting others. In re Sunbum5 Enterprises, LLC
, 2011 U.S. Dist. LEXIS 113295
(M.D. Fla. Sept. 30, 2011). Chapter 7 bankruptcy proceeding. Trustee
sought to retain Law Firm, and Law Firm moved for a finding of no
conflict. The bankruptcy judge granted the motion. In this opinion the
district judge reversed. Pre-petition, Law Firm had represented two
individuals in defending a state court case in which Debtor had sued for
an injunction and damages. The state court case, largely dormant at
the time of the motion in this case, was still pending, and Law Firm had
withdrawn. There were conflicting allegations before the district
court as to the viability of the state court case. In this opinion the
district court reasoned that Law Firm simply would not be in a position
to make a judgment as to the viability of the state court case.
In re Gluth Bros. Construction, Inc.,
2011 Bankr. LEXIS 4000 (N.D. Ill. Oct. 19, 2011). A bankruptcy judge
ordered Law Firm for the debtor to disgorge $128,000 (40% of its total
fees) for its "who cares" attitude and its "wanton disregard" (both
phrases, the court's) for disclosure rules in the Bankruptcy Act and
Rules. Law Firm, rather large with claimed expertise in bankruptcy
matters, did things like not disclosing its relationship to the majority
owner of the debtor, not disclosing that the majority owner had
guaranteed Law Firm's fees for work for the debtor, and had not
disclosed interim fees received during the bankruptcy, on forms required
for that purpose. That is a partial list. The opinion is a long one,
which meticulously parses a law firm's duties under Sections 327 and
329, Rules 2014 and 2016, and other applicable provisions. In re Ellipso, Inc.,
2011 Bankr. LEXIS 4113 (D.D.C. Oct. 24, 2011). In this opinion the
bankruptcy judge denied 40% of fees requested by debtor's counsel. The
analysis was fact-intensive. The court affirmed that not every
relationship with affiliates of debtor is a conflict. The partial
denial of fees was due to debtor's counsel's poor reporting of these
relationships and their failure to appear at the hearing on the fee
application, knowing that these alleged conflicts would be raised at the
hearing. The court believed he could draw adverse inferences for the
failure to appear.
Upon a motion to alter or amend the judgment, at In re Ellipso, Inc
., 2012 Bankr. LEXIS 176 (D.D.C. Jan. 19, 1012), the judge refused to disturb his fee finding. For reasons not clear to us the court found it necessary to re-enter the same relief at In re Ellipso, Inc
., 2012 Bankr. LEXIS 2277 (D.D.C. May 22, 1012). In re The Harris Agency, LLC
, 2011 U.S. Dist. LEXIS 132638 (E.D.
Pa. Nov. 17, 2011). Law Firm represented Debtor in this Chapter 11
proceeding. Law Firm appeared in another case on behalf of another
company ("Co. No. 2") in a related proceeding. Debtor and Co. No. 2 had
common owners. The U.S. Trustee moved to disqualify Law Firm in this
proceeding and moved to have Law Firm's fees forfeited, including fees
paid by third parties. The bankruptcy judge granted the motion. In
this opinion the district judge affirmed. In re Lewis Road, LLC
, 2011 Bankr.
LEXIS 4827 (E.D. Va. Dec. 9, 2011). Law Firm for the Debtor failed to
disclose that it represented a creditor when it was retained to
represent the Debtor. It also made misrepresentations to the court
about this relationship. As a result, the court ordered Law Firm to
disgorge fees previously awarded. The basis for undoing the fee award
was FRCP 60(b).
In re South Station, LLC
, 2011 Bankr. LEXIS 4856 (D. Utah Dec.
13, 2011). In this opinion the court denied Debtor's counsel's request
for fees exceeding $100,000. The denial was based upon counsel's
failure to disclose prepetition payments to counsel by principals and
creditors of Debtor. In re Woodcraft Studios, Inc
., 2011 U.S. Dist. LEXIS 147495 (N.D.
Cal. Dec. 22, 2011). Lawyer for Debtor failed to disclose in his
application for employment pre-petition work for Debtor or receipt of a
$5,000 retainer. The bankruptcy judge ruled that Lawyer should forfeit
all fees and disgorge the retainer. In this opinion the district judge
affirmed. In re MF Global Inc
., 2011 Bankr. LEXIS 5003 (S.D.N.Y. Dec. 27,
2011). This is a liquidation proceeding brought under the Securities
Investor Protection Act of 1970 ("SIPA"). It involves Jon Corzine's
company, MF Global. Two customers objected to the appointment of Lawyer
as trustee and Law Firm as trustee's counsel. In this opinion the
court held that both were "disinterested" within the meaning of both
SIPA and the Bankruptcy Act. First, the court rejected the claim that
Law Firm's earlier representation of Bank, a possible creditor, was a
conflict. Bank is no longer a client, and the earlier work was
unrelated to MFG. Accounting Firm, which was MFG's auditor, is a
current client of Law Firm and is Law Firm's auditor. The court said
that if Accounting Firm becomes involved in this proceeding, Law Firm
should seek engagement of conflicts counsel. In re Prosser
, 2012 U.S. Dist. LEXIS 1366 (D.V.I. Jan. 6, 2012).
Law Firm sought to bring a derivative claim against Bankrupt to avoid
certain alleged preferential transfers. Because Law Firm had
represented Bankrupt on matters related to this proceeding, the
bankruptcy judge held that Law Firm had a conflict and could not bring
the derivative action. In this opinion the district judge affirmed. RMB Fasteners, Ltd. v. Heads & Threads Int'l, LLC
, 2012 U.S.
Dist. LEXIS 8715 (N.D. Ill. Jan. 25, 2012). This case arises out of an
assignment for the benefit of creditors. Law Firm appeared in this case
for both the debtor and the assignment trustee. In this opinion the
court denied a motion to disqualify Law Firm, saying that, because the
trustee was not sued in his personal capacity, his interests and those
of the debtor were aligned. In re Kappy Inv., Inc
., 2012 Bankr. LEXIS 335 (D. Minn. Feb. 2,
2012). Law Firm filed a late application for approval as debtor's
counsel and approval of compensation for four-months work already done.
The court denied the application because Law Firm had an actual
conflict and several potential conflicts, none of which had Law Firm
disclosed. In re Chatkhan
Bankr. LEXIS 886 (E.D.N.Y. March 5, 2012). Because of Lawyer's
sloppiness in handling and reporting a $15,000 fee payment by Debtor's
husband, the court, in this opinion, denied Lawyer's entire fee request
of some $171,000. In re Persaud
2012 Bankr. LEXIS 884 (E.D.N.Y. March 5, 2012). In this Chapter 7
proceeding the Trustee sought leave to hire Law Firm as general counsel
and bankruptcy counsel. Creditor objected claiming that he and the
entity he controls had been represented by Law Firm in 2008, involving a
restaurant in China, and the representation, though dormant,
continues. In this opinion the court overruled the objection. First,
after a fact-intensive analysis, the court held that only Creditor's
entity had been a client of Law Firm. The court analyzed Creditor's
personal claim of being a client under Rule 1.18 and held that Creditor
was only a prospective client and had disclosed nothing to Law Firm
relevant to this proceeding. As to the entity, the court held that the
representation had ended and that, under Rule 1.9 (relating to former
clients), this proceeding was not substantially related to the earlier
representation. In re American Int'l Refinery, Inc.,
2012 U.S. App. LEXIS 6367 (5th Cir. March 29, 2012). Law Firm
represented Bankrupt before it went into bankruptcy and then represented
it in the bankruptcy. Law Firm failed to disclose to the court that
its $200,00 retainer had been funded by Bankrupt's principal creditor.
The trustee sought total forfeiture of Law Firm's fees. The bankruptcy
court denied that relief, but ordered Law Firm to pay a sanction of
$135,000, 20% of its total fees, for the failure to disclose the source
of the $200,000 retainer. In this opinion the Fifth Circuit affirmed.
First, the court agreed with the bankruptcy court that the retainer,
under the facts of this case, did not "create an adverse interest" or
rendered Law Firm "not disinterested." Second, the court agreed with
the bankruptcy court that the 20% sanction was an appropriate response
to Law Firm's unintentional violation of Bankruptcy Rule 2014(a). In re Stark Ceramics, Inc., 2012
Bankr. LEXIS 1329 (N.D. Ohio March 29, 2012). In connection with
debtor's counsels' fee application, questions were raised about debtor's
counsels' loyalty to the estate. The agreement to purchase the
debtor's property provided that the purchaser (the debtor's principal)
would assume the liability for fees to debtor's counsel. The court said this was "concerning," but standing alone did not establish an actual conflict of interest. In re nCoat, Inc.,
2012 Bankr. LEXIS 1698 (M.D.N.C. April 18, 2012). Law Firm was hired
as "special counsel" to handle Debtor's corporate and securities work.
When applying for compensation, it appeared that almost all the services
were general bankruptcy activities and no corporate or securities
work. In addition when the bankruptcy was filed, Debtor owed Law Firm
some $500,000 in pre-petition fees. The court denied the compensation
but gave Law Firm "one last chance" to show to the court specifically
what corporate and securities work Law Firm performed post-petition.
Special Counsel's Undisclosed Compensation. In re Moore,
2012 Bankr. LEXIS 1778 (N.D. Tex. April 23, 2012). Adversary
proceeding in Chapter 7 case brought by Creditor against an affiliate of
Debtor. Law Firm was hired as special counsel for the trustee.
Lawyer, at Law Firm was in charge of representing the trustee. Law Firm
had a long-standing relationship as counsel for Creditor. Creditor had
agreed to pay Law Firm's fees in the adversary proceeding and did so for
a period of time, some $92,000. This arrangement and the payments were
not disclosed to the court or the trustee. It was also shown that Law
Firm conveyed confidential trustee information to Creditor. As a result
of all this, the defendants in the adversary proceeding moved to
dismiss the adversary proceeding in its entirety (the "death penalty").
In this opinion the bankruptcy judge granted the motion. In sum, the
court found that "the very temple of justice has been defiled." [Note:
we hasten admit that we do not follow the complexities of this case.
What shines through is that when counsel for the trustee is being
compensated by a creditor, and the law firm involved is for a time on
both sides of litigation in the bankruptcy, approval from the court --
if such approval is even possible (doubtful) -- must be sought at the
very beginning of the proceedings.]
In re W.A.R. LLP,
2012 Bankr. LEXIS 1989 (D.D.C. May 4, 2012). At some risk of
over-simplification, we will keep this one as brief as possible. The
debtor is an LLP with two partners, P1 and P2. P1 and P2 are in
litigation against each other. In this opinion the bankruptcy judge
imposed sanctions on P1 and his lawyer for maintaining groundless
positions solely to frustrate P2. P1 is also a lawyer. One of the
bases for the sanctions was that P1 ghostwrote pleadings for a creditor
of the estate, which purported to be against P1. This, according the
court, was to further frustrate P2 and his claims against P1. The court
noted that ghostwriting is not per se improper, but doing so in this
case violated "Rule 1.7" and misled the court.
In re Walton,
2012 Bankr. LEXIS 1776 (M.D. Fla. April 20, 2012). In this opinion the
bankruptcy judge sorts through the ways debtor's counsel can be
compensated in Chapters 7 and 13 proceedings. Evidently the lawyer had,
pre-petition, been getting back-dated checks for post-petition
activities. The court objected to that. This opinion discusses a
preferable new arrangement, not involving post-dated checks.
In re Vista Bella, Inc.,
2012 Bankr. LEXIS 2391 (S.D. Ala. May 29, 2012). In this opinion the
court granted the Chapter 7 trustee's motion to employ Lawyer as special
counsel under Section 327(e) of the Bankruptcy Act. Lawyer's task was
to pursue claims against several parties for fraudulent transfers. The
only impediment to the hiring was that Lawyer had been handling several
actions that related to Debtor, the results of which could arguably have
adversely affected the bankruptcy estate. The court noted that two of
those matters had already terminated and that Lawyer was withdrawing
from the remaining one.
In Re Hamilton,
2012 Bankr. LEXIS 2701 (E.D.N.C June 14, 2012). Debtor's counsel
("Lawyer") also represented a party who might be subject to a fraudulent
conveyance claim. For that reason the court found that Lawyer had an
"actual" conflict of interest, allowed Lawyer to continue as debtor's
counsel, and disqualified Lawyer from representing the other party.
SBMC Healthcare, LLC,
2012 Bankr. LEXIS 2786 (S.D. Tex. June 18, 2012). In this opinion the
bankruptcy judge allowed the debtor to retain a lawyer who had a claim
for fees for prepetition services. In the face of the U.S. Trustee's
position that such a retention should never be allowed, the court, in a
lengthy analysis, outlined the situations in which it could.
In re Carlson,
2012 Bankr. LEXIS 3535 (D. Neb. Aug. 1, 2012). Law Firm had defended
several persons in an earlier suit in state court by this Chapter 7
Debtor to recover certain property. Debtor did obtain some of the
property he sought in a settlement of that case. Now, the trustee is
seeking to recover that property from the Debtor for the bankruptcy
estate. The trustee sought, pursuant to 11 U.S.C. Sec. 327(c), to
retain Law Firm as special counsel to recover the property. The Debtor
objected to the retention. In this opinion the bankruptcy judge
approved the retention, noting that no creditor was objecting, which,
according to that section, would have mandated disapproval. The court
also held that Sec. 327(c) does not disqualify Law Firm for having
previously represented creditors where, as here, that relationship does
not potentially adversely affect the bankruptcy estate.
In re Cecil,
2012 U.S. Dist. LEXIS 108701 (M.D. Fla. Aug. 3, 2012). Chapter 13.
The trustee obtained an order approving the appointment of a "special
counsel." In this opinion the district judge reversed. First, the
judge noted that 18 U.S.C. Sec. 327(e) does not recognize the
appointment of special counsel in Chapter 13 cases. Second, the court
held that because the special counsel represented a creditor, that was
disqualifying under Sec. 327(e). In re Residential Capital, LLC,
2012 Bankr. LEXIS 3706 (S.D.N.Y. Aug. 10, 2012). In this unremarkable
opinion the court does lay out the requirements for appointment of
special counsel for the debtor under 11 U.S.C. Sec. 327(e). Forizs & Dogali, P.A. v. Siegel,
2012 U.S. Dist. LEXIS 136052 (M.D. Fla. Sept. 24, 2012). The debtor in
this bankruptcy had been engaged in a Ponzi scheme. Law Firm was
retained as "special counsel" to recover funds from investors who had
received more from the debtor than they had invested. After being
retained, Law Firm filed, on behalf of an investor, a claim for an
amount that exceeded his investment. Law Firm neglected to report this
to the court. Another creditor moved to have the special counsel
appointment revoked. The bankruptcy judge granted the motion. In this
opinion the district judge affirmed. In re Sundance Self Storage-EL Dorado LP,
2012 Bankr. LEXIS 5277 (E.D. Cal. Nov. 6, 2012). Lawyer for Debtor
("Lawyer") was awarded some $60,000 in fees when Debtor's Chapter 11
case was converted to Chapter 7. Smith had operational control over
Debtor during the Chapter 11 case. Lawyer represented Smith on other
matters. During the Chapter 11 proceeding, without court approval,
Smith conveyed Debtor's only asset to Brown, the principal owner of the
debtor. Smith told Lawyer that Brown would cover Lawyer's fees for some
of Lawyer's activities. Lawyer also was owed fees from Debtor for
services before the Chapter 11 case. Lawyer disclosed none of these
relationships to the court, even after prodding by the court. In this
opinion the court ordered that Lawyer be awarded no fees and that all
fees already paid to Lawyer be disgorged. The opinion is a
mini-treatise on the Bankruptcy Act's requirements for debtor's counsel
regarding having no interests adverse to the estate, being
disinterested, and the need for disclosure of all relationships relevant
to those concepts. In re Jackson,
2012 Bankr. LEXIS 5648 (S.D. Tex. Dec. 5, 2012). Chapter 7. The
trustee, a lawyer, sought leave to employ his own law firm, and two of
his partners, to represent the trustee in certain matters, including a
patent infringement claim. The deficiencies in the application, at
least in the mind of the bankruptcy judge, required the judge to write a
25-page treatise on what a trustee must show in order to gain approval
of hiring his own law firm. We choose not to go into the opinion in any
depth except to point out an interesting requirement for a law firm to
show it is "disinterested" within the meaning of Section 327(a) of the
Bankruptcy Act. First, the court held that the law firm had no adverse
interest, merely because it was the trustee's law firm. As to
disinterestedness, the law firm's conflict check included only checking
for conflicts with "the scheduled creditors" of the estate. The court
said that was deficient and that the firm should have checked for
possible infringers among all its clients. As to this requirement, and
those requirements we have not discussed, the court denied retention but
left it up to the trustee and the law firm to file a new application
that complies with the court's opinion. In re Sonya D. Int'l, Inc.,
2012 Bankr. LEXIS 5763 (C.D. Cal. Dec. 14, 2012). We cannot grasp the
facts or the parties' arguments. In this opinion the court granted the
debtors' application to employ "additional" counsel in related trust
litigation. The opinion contains an interesting discussion as to
whether Sec. 327(a) or (e) should apply, given the fact that the lawyers
in question did not represent the debtors prepetition. In re Persaud,
2013 U.S. Dist. LEXIS 12674 (E.D.N.Y. Jan. 30, 2013). Chapter 7.
Trustee's motion to retain Law Firm. Creditor objected claiming Law
Firm was representing his business in China. This, he claims, enabled
Law Firm to use Creditor's information against Creditor. In a very
fact-intensive analysis both the bankruptcy judge, and then the district
judge in this opinion, granted the motion to retain. One of the
court's findings was that the earlier representation had ended. Most of
the analysis dealt with the "disinterested" requirement under Section
327(a) of the Bankruptcy Act. In a brief discussion of New York ethics
rules, the district judge noted that the Bankruptcy Act is stricter than
the state rules, although that made no difference in this case.
In re Niroomand,
2013 Bankr. LEXIS 383 (S.D. Fla. Jan. 31, 2013). Chapter 7. In an
earlier case Trustee and Lawyer successfully sued another Law Firm for
malpractice. In this case Trustee and Lawyer are seeking an injunction
under the Barton Act barring the other Law Firm from litigating certain
matters in state court. In either the state court action or in this
action (not clear from opinion) the other Law Firm brought claims
against both Trustee and Lawyer for malicious prosecution and abuse of
process. For that reason Law Firm moved to disqualify Lawyer for having
a conflict of interest with Trustee. In this opinion the court held
that Trustee could, and did, waive the conflict.
In re Leachman,
2013 U.S. Dist. LEXIS 14115 (N.D. Cal. Feb. 1, 2013). Chapter 7.
Pre-petition, Lawyer obtained a judgment against the debtor.
Post-petition, Lawyer attempted to bring a malpractice action against
another law firm on behalf of the debtor. In this opinion the court
held that a creditor could not do this in a Chapter 7 case. There might
be an exception, the court said, in an "avoidance action," which this
was not. In re Murray,
2013 Bankr. LEXIS 635 (N.D. Cal. Feb. 20, 2013). Law Firm A represented
Debtors in a dispute with Debtors' tenants. The tenants were
represented by Lawyer B. Debtors failed to pay Law Firm A's fees. Law
Firm A retained Lawyer B to collect the fees from Debtors while Lawyer B
continued in state court litigation for tenants against Debtors.
Debtors moved to disqualify Lawyer B in the fee case. In this opinion
the bankruptcy judge granted the motion. In re First State Bancorp.,
2013 Bankr. LEXIS 873 (D.N.M. March 6, 2013). Debtor in this Chapter 7
proceeding is a bank holding company. Bank is a wholly-owned
subsidiary of Debtor. There are only three creditors of Debtor, one
being an insignificant state claim for taxes. The only other creditors
are TrustCo, an unsecured creditor, and FDIC, receiver of Bank. Trustee
of Debtor sought to hire Law Firm to assert positions adverse to FDIC.
FDIC objected to retention of Law Firm, in part because Law Firm was
representing TrustCo in this and other similar proceedings. In this
opinion, after a very lengthy analysis, the court found a conflict and
denied retention of Law Firm. In re Gregory & Parker, Inc.,
2013 Bankr. LEXIS 1206 (E.D.N.C. March 28, 2013). Corp. is one
debtor. Corp's 100% owner ("Owner") and his wife are debtors in a
related proceeding. Corp. and Owner would like to hire Law Firm,
pursuant to §327(c), to pursue an adversarial claim against Third
Party. In this opinion approving the retention the court noted that,
although the same general counsel could not handle jointly bankruptcies
for an entity and its owner, in this adversarial proceeding the debtors'
interests are aligned.
In re Bon-Air P'Ship v. Trumble,
2013 U.S. App. LEXIS 7316 (4th Cir. April 11, 2013). In this opinion
the court held that Chapter 7 trustee could hire a law firm as special
counsel even though that law firm was asserting a claim against a
general partner of Debtor on behalf of another client. In re Rodriguez-Borges,
2013 U.S. Dist. LEXIS 52528 (D.P.R. March 28, 2013). Chapter 7. In
this opinion the district judge held that an order of the bankruptcy
judge disqualifying Debtor's counsel was not appealable to the district
judge as of right. In re Arazi, 2013
Bankr. LEXIS 1530 (D. Mass. April 9, 2013). Chapter 7. Trustee
retained his law firm to represent him. After this retention the law
firm brought two actions against debtor. The law firm failed to
disclose these actions to the bankruptcy court, in violation of
Massachusetts Local Bankruptcy Rule 2014-1. Because of this violation
the court reduced the law firm's fee. The court noted that had the
above representations been materially adverse to the estate or had the
law firm lost its disinterestedness, it would have forfeited its fee
completely. In re Dube, 2013
Bankr. LEXIS 1696 (C.D. Cal. April 23, 2013). Debtor filed this case
under Chapter 7. It was subsequently converted to Chapter 11. Debtor
employed two law firms to assist in her divorce. After being in Chapter
11 for five years, the case was converted back to Chapter 7. The law
firms petitioned for fees. Debtor's former husband objected, in part
because the law firms had a conflict of interest in keeping the Chapter
11 going so long. In this opinion the court rejected that argument
noting that the law firms did not have pre-petition claims against the
Debtor or prior representations of adverse parties.
In re Brown Publ'g Co.,
2013 Bankr. LEXIS 1743 (E.D.N.Y. April 29, 2013). Very complicated
Chapter 11 proceeding involving a publishing company and its
affiliates. A liquidating trust ("Trust") was formed, and Trust,
represented by Law Firm, filed an action against the debtors' former
officers, directors, shareholders, and affiliates. One defendant, the
CEO of debtors, moved to disqualify Law Firm because Law Firm had
represented him in connection with debtors' business. In this highly
fact-intensive opinion the bankruptcy judge found that Law Firm had
represented the CEO. In the absence of any formal evidence of the
representation, the court relied heavily on Restatement Sec. 14(1). The
court also held that Law Firm had not complied with Bankruptcy Rule
2014, in failing to specify its relationship with creditors of Debtors.
The court scheduled a sanctions hearing for later in May. Auday v. Wetseal Retail, Inc.,
2013 U.S. Dist. LEXIS 80535 (E.D. Tenn. June 6, 2013). Debtor in this
Chapter 7 case is also a plaintiff in an employment discrimination case
against the defendant. One of the holdings in this opinion is that the
Chapter 7 trustee can stand in the shoes of Debtor to prosecute the
discrimination claim. However, the court held it would be an
unacceptable conflict for the Debtor's law firm to represent the trustee
in prosecuting that claim. The court also held that the
confidentiality issues would make a conflicts waiver ineffective. In re Autosport Int'l, Inc.,
2013 Bankr. LEXIS 2530 (C.D. Cal. June 24, 2013). Law Firm assisted
Chapter 7 trustee in recovering an exotic car for the estate. Creditors
objected to fees for Law Firm because Law Firm had represented a
creditor of the debtor and had been a creditor itself. The court said
those relationships had not harmed the estate and approved the fees. In re Barnes,
2013 Bankr. LEXIS 2876 (D. Ore. July 16, 2013). Chapter 7 Debtor was
sued in Nevada by Nevada Plaintiff for an auto injury, resulting in a
judgment against Debtor. Debtor then filed this Chapter 7 proceeding.
The trustee sought leave to hire Lawyer to sue Debtor's auto policy
carrier and Debtor's Nevada lawyers. Lawyer represented Nevada
Plaintiff in the Nevada case and continues to represent Nevada
Plaintiff. Nevada Plaintiff is the only unsecured creditor in this
proceeding. The Nevada judgment is largely satisfied. In this opinion
the bankruptcy judge denied Lawyer's retention. First, the court noted
ways in which Lawyer might work to benefit Nevada Plaintiff to the
detriment of the estate. Second, the court noted Lawyer's woeful
disclosures in violation of Bankruptcy Rule 2014(a). Among other things
Lawyer failed to disclose her continuing representation of Nevada
Plaintiff and failed to disclose the particulars of her contingent fee
agreement with Nevada Plaintiff. In re Williams,
2013 Bankr. LEXIS 3105 (E.D. Va. Aug. 1, 2013). Individuals A and B
each owned 50% of LLC. A and B are disputing who has rights to money in
LLC. LLC is in bankruptcy as are A and B. The court appointed a
liquidating trustee for LLC. The trustee sought leave to hire Law
Firm. B objected, claiming Law Firm had a conflict. In this opinion
the court denied the motion on the basis that Law Firm is not being
adverse to B, only, arguably, to B's bankruptcy estate. Moreover, the
trustee of B's estate has not objected to the retention.
In re Hart Oil & Gas, Inc.,
2013 Bankr. LEXIS 3128 (D.N.M. Aug. 2, 2013). Chapter 11 Trustee
applied to hire Law Firm as special counsel pursuant to 11 U.S.C.
§327(e). The scope of duties included all sorts of things relating to
formulating and implementing the plan. In denying the application the
court first held that Law Firm did not comply with §327(e) because the
duties fell within the phrase "conducting the case." Thus, Law Firm
would have to comply with §327(a). It could not because it had a
$100,000 claim against the estate for work done for Debtor, and it
continued to represent Debtor. Thus, Law Firm was not "disinterested."
In re Marsh, 2013
Bankr. LEXIS 3430 (D. Mont. Aug. 21, 2013). Chapter 7 trustee sought leave,
pursuant to 11 U.S.C. §327(d), to hire herself as lawyer to pursue
assets for the estate on a contingent fee basis. The bankruptcy judge
granted leave. Debtor sought rehearing. In this opinion the court
In re Signature Apparel Group LLC,
2013 Bankr. LEXIS 3748 (S.D.N.Y. Sept. 10, 2013). Law Firm represented
three creditors who filed an involuntary petition to put Signature into
Chapter 7 bankruptcy. The case was converted to Chapter 11. Law Firm
was appointed counsel to the creditors' committee. Law Firm then
commenced this action on behalf of Signature against Defendants for
various business torts and related claims. Defendants moved to
disqualify Law Firm. In this opinion the bankruptcy judge, calling the
motion a "lightweight litigation maneuver," denied the motion. The
court put the standing issue aside and ruled that there was simply no
showing of a conflict. The court also noted that in smaller Chapter 11
cases the same law firm might wear several different hats.
Cal. Proposed Op. 12-0004. Cal. COPRAC has
published for public comment a proposed opinion that holds that a lawyer
may represent a Chapter 7 debtor while simultaneously representing one
or more creditors in unrelated matters. The opinion relies heavily upon
N.Y. City Op.. 2005-01, which held basically the same. In re Advisory Comm. of Prof’l Ethics, 2014 N.J. LEXIS 652 (N.J. July 2, 2014), is also basically the same.
In re Mitchell,
2013 Bankr. LEXIS 3937 (E.D.N.C. Sept. 20, 2013). Shortly prior to
filing its Chapter 11 petition, Debtor conveyed some $600,000 worth of
property to Company. When Law Firm applied to be Debtor's counsel, Law
Firm failed to disclose that it represented the half owner of Company.
For that reason, in this opinion, the court denied Law Firm's request
In re GFI Commercial Mort. LLP,
2013 U.S. Dist. LEXIS 124077 (N.D. Cal. Aug. 29, 2013). In this
Chapter 11 proceeding, for a time Lawyer represented both the liquidator
and a committee of limited partners. When a dispute arose between the
liquidator and the committee, Lawyer ceased representing each. Because
of the conflict the committee moved for an order of fee disgorgement.
The bankruptcy judge denied that motion. In this opinion the district
judge affirmed. The court ruled that although Lawyer's conduct might
have violated California Rule 3-310(C)(1)(the "potential conflict"
provision), the court had discretion to allow fees where the violation
was not "egregious." [Note: California is the only state to
recognize "potential conflicts" in its ethics rules. The concept is
also recognized in bankruptcy cases -- in California and in other
jurisdictions.] In re Miners Oil Co., Inc.,
2013 Bankr. LEXIS 5077 (W.D. Va. Dec. 3, 2013). Debtor’s Counsel
applied for fees. In this opinion the court reduced the fees by
approximately 10%, largely because of what the bankruptcy judge thought
was a less than perfect disclosure by Debtor’s Counsel in his retention
application. Creditor’s Counsel briefly mentioned pre-petition dealings
with the 100% owner of the Debtor with no specifics, some of which the
bankruptcy judge thought were important. Very fact-specific opinion.
Anyone concerned about such disclosures, particularly bankruptcy
specialists in the Western District of Virginia, should read the
opinion. In re Klein,
2013 Bankr. LEXIS 5096 (C.D. Cal. Dec. 4, 2013). Debtor started out in
this Chapter 11 proceeding as a debtor in possession. At some point a
Chapter 11 trustee was appointed for cause, based upon DIP’s
mismanagement of the estate. Debtor moved to disqualify the trustee’s
lawyer (“Lawyer”). In this opinion the bankruptcy judge denied the
motion. Debtor’s problem with Lawyer was that Debtor had met with
Lawyer about retaining Lawyer while Debtor was still in possession. He
claimed to have shared confidences with Lawyer. The court’s ruling was
largely based upon the fact that Debtor should have disclosed everything
about his business as part of the bankruptcy filings. Thus, there
would have been nothing confidential to disclose to Lawyer. [Note: the court’s ruling was consistent with Idaho Rule 1.18, but the court did not mention the rule.] In re GSC Group, Inc.,
2013 Bankr. LEXIS 5204 (S.D.N.Y. Dec. 12, 2013). Chapter 11. Failure
to disclose relationships. Law Firm, representing Debtor, allowed the
proposed financial advisor to the estate to misrepresent the
relationship between the advisor firm and a key individual member of the
advisor team. Law Firm also failed to inform the court of its own
relationship to several involved entities. The U.S. Trustee sought to
have Law Firm forfeit all its fees. They settled without a court order
(long story) with Law Firm agreeing to decrease its fees by $1.5 million
(roughly 28%). In re Moore,
2014 U.S. App. LEXIS 470 (5th Cir. Jan. 9, 2014). While this opinion
involves a conflict of interest, at bottom it is about the standard to
be applied in the court’s application of its inherent power to sanction a
party. The bankruptcy court had dismissed an adversary action as a
sanction because the plaintiff had been sloppy in disclosing, and
dealing with, a conflict. The district court affirmed. In this opinion
the appellate court reversed holding that there was insufficient
evidence that the party charged “willfully abused the judicial
In re Garcia,
2014 Bankr. LEXIS 327 (D. Kan. Jan. 24, 2014). Debtor’s Counsel was
unable to explain why he failed to file timely a Rule 2016(b) disclosure
of fees he had received from the debtor. Because the lawyer had done a
workmanlike job on the case, and because the lawyer had a good
reputation as a bankruptcy lawyer, the court declined to deny totally
the lawyer’s fee, reducing it by one third. This was, in part, to send a
message to the bankruptcy bar about its disclosure obligations.
In re Hummer Transp.,
2014 U.S. Dist. LEXIS 13186 (E.D. Cal. Feb. 3, 2014). Lawyer
represented personal injury plaintiffs (“PIPs”) in an action against Co.
PIPs won a verdict of $5 million. PIPs then filed an involuntary
Chapter 7 petition against Co. Trustee applied to hire Lawyer to pursue
claims against the law firm that lost the personal injury case (“Defense
Firm”) and Co.’s insurance company (“InsCo”) for bad faith. Defense
Firm and InsCo opposed retention of Lawyer. The bankruptcy judge
approved the retention. On appeal the district judge affirmed. First,
the court held that because Lawyer was not a creditor of Co., Lawyer was
disinterested. Second, the court held that because Trustee’s interests
were aligned with PIPs, Lawyer did not have a conflict of interest.
KLG Gates v. Brown,
2014 U.S. Dist. LEXIS 19998 (E.D.N.Y. Feb. 18, 2014). The most
significant part of this opinion for purposes of this audience is the
court’s discussion of how much disclosure debtor’s counsel should make
under Bankruptcy Rule 2014. The law firm listed 481 creditors who were
the law firm’s clients on other matters. The form did not contain any
detail about potential conflicts with the estate. The district judge
found the filing wanting and remanded the matter to the bankruptcy court
to determine whether the law firm should be disqualified.
In re Fresh Choice, LLC,
2014 Bankr. LEXIS 916 (N.D. Cal. March 10, 2014). In this opinion the
bankruptcy judge ordered debtor’s counsel to forfeit all fees. Among
other things, the lawyer failed to disclose that he was a creditor of
the estate. The lawyer also failed to disclose that he had a
relationship with the owner of the debtor and was holding about a
million dollars of the owner’s funds in escrow pending resolution of the
owner’s dispute with owner’s wife.
In re Grant,
2014 Bankr. LEXIS 959 (E.D. Cal. March 10, 2014). After the debtor
filed its Chapter 7 petition, Law Firm entered into a contingent fee
agreement involving the death of the debtor’s daughter. Among other
things, the agreement created a charging lien against the estate. A year
after learning of the bankruptcy Law Firm sought approval of its
retention and compensation. In this opinion the bankruptcy judge denied
In re Rental Systems, L.L.C.,
2014 Bankr. LEXIS 1057 (N.D. Ill. March 17, 2014). No purpose would be
served by a discussion of all the connections the lawyer in question had
with this Chapter 11 proceeding. Because of the lawyer’s connections
with creditors of the estate and persons and entities owing money to the
estate, and because the lawyer failed timely to disclose significant
parts of these relationships, the bankruptcy judge denied a tardy
application to employ the lawyer.
In re Charles St. African Meth. Epis. Church of Boston,
2014 Bankr. LEXIS 2201 (D. Mass. May 9, 2014). In this Chapter 11 case,
debtor Church moved to sell certain real estate. Debtor’s counsel, a
leading Boston law firm (“Law Firm”) was handling the matter pro bono.
Several parties objected to Law Firm’s participation in the sale because
Law Firm had disclosed that it represented one of the bidders in
unrelated matters, that it had relationships with members of the boards
of both bidders, and that two partners of Law Firm served on the boards
of bidders. Law Firm said it had erected screens between the partners
associated with the bidders and the lawyers handling the sale. In this
opinion the bankruptcy judge overruled the objections and permitted Law
Firm to proceed with the sale.
In re Lennys Copy Ctr. & More LLC, 2014 Bankr. LEXIS 3138
(E.D. Mich. July 18, 2014). Chapter 7. In this adversary proceeding the
Chapter 7 trustee is seeking to overturn $26,000 of fraudulent
conveyances to Defendants. Law Firm has represented Debtor since before
the Chapter 7 proceeding commenced. Law Firm also appeared for
Defendants in this adversary proceeding. The trustee moved to disqualify
Law Firm in the adversary proceeding. In this opinion the bankruptcy
judge granted the motion, finding a current client conflict. The court
rejected Law Firm’s suggestion that it might ameliorate the conflict by withdrawing from representing Debtor, using a “hot-potato”-like analysis
(but not using the term).
In re Owens, 2014 Bankr. LEXIS 3346 (9th Cir. BAP Aug. 6, 2014).
Debtor filed two Chapter 11s within eight months. Lawyer represented
Debtor in the first one. Lawyer sought to represent Debtor in the second
one (this one). Lawyer is still owed fees from the first one. The
bankruptcy court found Lawyer not disinterested under § 327 because
Lawyer refused to waive his claim to those fees “clearly and
unconditionally.” In this opinion the Panel affirmed.
In re Legacy Dev. SC Grp., LLC, 2914 Bankr. LEXIS 3899 (D.S.C.
Sept. 11, 2914). Chapter 7. Prior to filing, Debtor conveyed $1,000,000
to one of the defendants in this case (“LeGrand”). This suit contains a
claim for fraudulent conveyance. Both LeGrand and another company
(“Heritage”), of which LeGrand is managing member, are defendants.
Lawyer is representing both LeGrand and Heritage. Heritage is a creditor
of the estate. Plaintiff moved to disqualify Lawyer. In this opinion
the bankruptcy judge denied the motion, deferring to Lawyer’s judgment
as to what would be most beneficial to his clients. The relationships
are complex and include the possible interests of Class B members of
Heritage. The court suggested that future developments could create an
impermissible conflict for Lawyer.
In re Delta Produce, LP, 2014 U.S. Dist. LEXIS 132427 (W.D. Tex.
Sept. 22, 2014). Chapter 11. Debtor is, among other things, a purchaser
of perishables and covered by the federal Perishable Agricultural
Commodities Act of 1930 (“PACA”), 7 U.S.C. § 499(a)-(t). PACA provides
for the creation of trust-like entities to ensure that sellers of
produce are promptly and fairly compensated by purchasers. PACA provides
for compensation of the trusts’ lawyers. In this case Lawyer was
appointed as special counsel under § 328 of the Bankruptcy Act to deal
with PACA claims. This opinion deals with the interplay of PACA and the
Bankruptcy Act and discusses the entitlement to, and the timing of,
Lawyer’s compensation. There were allegations that Lawyer had a conflict
of interest due to the interplay of these laws. Given the absolutely
unique nature of these concepts, that is all we will say about the case.
If you are involved in bankruptcy and PACA, you should read the
In re Madera Roofing, Inc., 2014 Bankr. LEXIS 4128 (E.D. Cal.
Sept. 25, 2014). Chapter 11. Some months prior to filing this
proceeding, Debtor gave Law Firm a $50,000 retainer. After the filing,
Law Firm sought appointment as general counsel for Debtor. In its
filings Law Firm accounted for the retainer in a highly misleading and
incomplete way. The court granted Law Firm’s application. Ultimately,
when Law Firm’s conduct came to light, the bankruptcy judge, in this
opinion, ordered Law Firm to disgorge the $50,000 and denied Law Firm’s
petition for some $130,000 in post-filing fees.
In re Hall, 2014 Bankr. LEXIS 4788 (D. Kan. Nov. 19, 2014).
Chapter 11 debtor sought to retain lawyer under § 327 of the Bankruptcy
Act. Debtor owed Lawyer fees for pre-filing work on this bankruptcy. In
the opinion the bankruptcy judge, among other things, allowed Lawyer’s
retention and held that fees owed Lawyer for that bankruptcy-related
work does not make Lawyer not disinterested under § 327. Cal. Op. 2014-191 (undated). In this opinion
the committee discusses the extent to which a lawyer may, without the
written consent of the parties, represent the debtor in a “simple,
no-asset” Chapter 7 case where the lawyer represents creditors of the
estate on unrelated matters. In re Digerati Techs., Inc., 2015 WL
152886 (S.D. Tex. Jan. 12, 2015). An investment banker retained by
Debtor petitioned for fees. In this opinion the bankruptcy judge denied
the petition on a number of grounds, including failure to benefit the
estate. One ground, which the judge said was alone sufficient to deny
compensation was the investment banker’s failure to disclose its
relationship with Debtor’s counsel, in violation of Bankruptcy Rule
2014. In re McIntosh, 2015 WL 241130 (N.D.
Cal. Jan. 16, 2015). Lawyer filed a Chapter 13 petition for Debtor.
While representing Debtor Lawyer took the position that a deed of trust
executed to secure a debt to creditors was invalid. This would have
meant that certain funds would have gone to Debtor to satisfy Debtor’s
homestead exemption. After Debtor discharged Lawyer, Lawyer took the
position that the funds should instead go to unsecured creditors
including Lawyer. In this opinion the court denied Lawyer’s request for
fees because of Lawyer’s conflict. The court premised the finding of the
conflict upon Lawyer’s “duty of loyalty” to his former client. [Note:
there is no such duty to former clients. See, Charles W. Wolfram,
Former-Client Conflicts, 10 Geo. J. Legal Ethics 677, 691-699 (1997).
The court could have reached the same result via reference to the
substantial relationship test as it relates to former clients.] In re Hutch Holdings, Inc
., 2015 WL 1543255 (S.D. Ga. March 31,
2015). Law Firm sought to be approved as debtor’s counsel in this
Chapter 11 proceeding. Law Firm violated Bankruptcy Rule 2014 by not
disclosing certain relationships, including the fact that it represented
the 100% shareholder of the debtor in his own bankruptcy. The U.S.
Trustee objected to Law Firm’s employment. The court found that the
undisclosed relationships did not warrant disqualification. However, the
court found the Law Firm’s habitual failure to comply with Rule 2014,
as shown in this and other cases, warranted sanctions in this case.
Thus, the court ordered that Law Firm be denied all fees relating to the
U.S. Trustee’s objection, which the court believed, when determined,
would be “substantial.” In re Gress
, 2015 WL 1744165 (M.D. Pa. April 14, 2015). In this
Chapter 7 proceeding Debtors’ counsel made a series of mistakes. The
trustee threatened to sue Debtors’ counsel for malpractice. Claiming
Debtors’ counsel had a conflict of interest, the trustee moved to
disqualify Debtors’ counsel. In this opinion the court denied the
motion, stating that because counsel’s “competence” was the issue, not
his “integrity,” disqualification would not be appropriate. The court
did, however, say it would order Debtors’ counsel to show cause why he
should not disgorge fees for his “practices.”Home/Table of Contents