Brian Behr is a staff attorney with the U.S. Bankruptcy Administrator for the Eastern District of North Carolina in its Raleigh Division.
In re Kimberly Nifong Mitchell, Case No. 11-08880-8-ATS (Bankr. E.D.N.C. Sept. 20, 2013), is a chapter 11 case involving the law firm of Oliver, Friesen, Cheek PLLC (OFC) and Bankruptcy Code §§ 503(b)(1)(A) and 507(a)(2). OFC was disqualified due to an undisclosed potential conflict of interest between two of its clients. The basis of the conflict was an eve-of-bankruptcy property transaction between the debtor and a corporate entity. OFC did not represent the corporate entity, but did represent John Glass Hamilton, Sr., the 50 percent owner of the entity, who was also a chapter 11 debtor. In the disqualification order, the court found that the facts of the property transaction “create a colorable fraudulent conveyance claim” and that OFC “owed a duty to the debtor to fully investigate the nature of the transaction and file an action to recover for fraudulent conveyance if necessary. This obligation is at odds with OFC’s duty not to undo the transaction in Mr. Hamilton's case.” In re Mitchell, No. 11-08880-8-ATS (Bankr. E.D.N.C. June 14, 2012) (Leonard, J.).
Approximately one year after the order disqualifying OFC was entered, OFC filed an Application for Allowance of an Administrative Expense Claim pursuant to §§ 503(b)(1)(A) and 507(a)(2). Within the Application, OFC sought $50,360.71 in compensation for the work it had performed for the debtor prior to being disqualified. The U.S. Bankruptcy Administrator for the Eastern District of North Carolina objected to this request on the basis that Bankruptcy Code § 503(b)(2) is the exclusive means for approval of post-petition professional fees and, as a result, that § 503(b)(1)(A) of the Bankruptcy Code should not be available to side-step the requirements of § 503(b)(2) and the related obligations under Bankruptcy Code §§ 327 and 330(a).
The court agreed with the Bankruptcy Administrator that § 503(b)(2) is the sole means for approval of post-petition professional fees. Surry Inv. Servs. v. Smith, 418 B.R. 140 (M.D.N.C. 2009); In re Albrecht, 233 F.3d 1258 (10th Cir. 2000); F/S Airlease II Inc. v. Simon (In re F/S Airlease II Inc.), 844 F.2d 99 (3d Cir. 1988). Turning to whether the court could award attorneys’ fees to disqualified counsel pursuant to § 503(b)(2), the court recognized that there was no controlling circuit level authority in the Fourth Circuit and identified a split of authority between the Sixth and Seventh Circuits. The Bankruptcy Administrator advocated that the court adopt the Sixth Circuit’s holding that “a valid appointment under Section 327(a) is a condition precedent to the decision to grant or deny compensation under Bankruptcy Code sections 330(a) or § 328(c).” Michel v. Federated Dep’t Stores Inc. (In re Federated Dep’t Stores Inc.), 44 F.3d 1310, 1319-1320 (6th Cir. 1995). OFC advocated that the court adopt the Seventh Circuit’s holding that the language of § 328(c) of the Bankruptcy Code, “a professional person employed under section 327,” does not require that the person be validly employed under Bankruptcy Code § 327, just simply employed. Kravit, Gass & Weber S.C. v. Michel (In re Crivello), 134 F.3d 831, 837 (7th Cir. 1998).
The court ultimately followed the Seventh Circuit’s holding that the language of § 328(c) provides the court discretion to allow or disallow fees of disqualified counsel. The court also spelled out the warning provided by the Seventh Circuit in Crivello to professionals who might be tempted to not disclose a connection:
In applying its discretion, the court determined that all of the requested fees should be disallowed. The court found that given the experience of OFC, they should have known that representing both debtors created a disqualifying conflict of interest. Further, even if OFC was unsure about whether the joint representation was permissible, OFC was obligated to disclose the potential conflict and bring it to the court’s attention, which it did not. Given these failures by OFC, the court concluded that OFC “assumed the risk that the firm would be disqualified from representing the debtor and that the firm would not be compensated for the legal work performed pursuant to an order of employment that was based on OFC’s incomplete and misleading affidavit.” The court found no mitigating circumstances that would justify an award of fees, and therefore denied the applicatio