The failure to disclose a simultaneous representation of the corporate debtor’s principal resulted in the denial of all compensation and reimbursement sought by the debtor’s counsel, in an opinion by Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif.
In his April 5 opinion, Judge Jaime explained why he had discretion to deny all compensation and reimbursement under both Section 328(c), for holding an adverse interest, and alternatively, Bankruptcy Rule 2014(a), for failure to disclose “connections” with creditors and parties in interest.
The facts about the law firm’s conflict only dribbled out months after the corporate debtor filed a petition under Subchapter V of chapter 11.
Before bankruptcy, employees had prosecuted a wages and hours lawsuit in state court. The suit resulted in a $485,000 settlement for which the corporate debtor and its principal were both liable.
The principal did not file a bankruptcy petition, but the corporation did. In its application for retention as the debtor’s general bankruptcy counsel, the firm did not disclose that it was representing the principal.
The firm’s simultaneous representation of the principal slipped out about three months after filing, when one of the firm’s lawyers said to counsel for the secured lender that the principal was the firm’s client. A week later, the Subchapter V trustee told the firm that the representation should be disclosed.
The firm did not disclose the representation of the principal until some 10 months after filing, when the firm filed a supplemental declaration. The lawyer who signed the declaration said that she had only learned about the representation of the principal two days earlier.
Judge Jaime said that the declaration was not “credible,” because the firm’s time records revealed that the same lawyer had been involved in discussions regarding the principal and his liability for the wages and hours settlement.
But there was more, according to Judge Jaime. The firm drafted and filed two versions of a chapter 11 plan that would have given the principal a third-party release of liability for the settlement. In addition, the employees filed a motion for a so-called comfort order, asking the bankruptcy court to declare that the employees could pursue the principal without violating the automatic stay. Evidently, the debtor’s lawyers opposed the motion.
Judge Jaime issued his opinion in response to the firm’s first interim application for compensation. First, he analyzed the propriety of an award of compensation under Section 328(c).
That section provides that
the court may deny allowance of compensation for services and reimbursement of expenses of a professional person . . . if, at any time . . . , such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate . . . .
Judge Jaime said that the section “further permits the bankruptcy court to deny all compensation and reimbursement of all expenses.” [Emphasis in original.]
Judge Jaime found two actual conflicts. First, the plan would have imposed all of the liability for the settlement on the debtor, to the benefit of the principal and at the debtor’s expense. Second, opposition to the comfort order likewise protected the principal to the detriment of the debtor.
The dual representations led Judge Jaime to say he had “no difficulty” in concluding that the firm had an actual conflict arising from the simultaneous representation of the debtor and the principal. Exercising discretion, he denied all compensation and reimbursement under Section 328(c).
Next, Judge Jaime dealt with Rule 2014(a), which, he said, “provides an equally powerful tool to remedy nondisclosure or the incomplete disclosure of connections that give rise to an adverse interest discovered during a bankruptcy case.” Among other things, the rule requires “a verified statement of the person to be employed setting forth the person’s connections with the debtor, creditors, any other party in interest.”
The rule, Judge Jaime said, gives the court “‘inherent’ authority to remedy nondisclosure or disclosure that is less than complete,” citing Ninth Circuit authority.
The firm, Judge Jaime said, “had no business securing employment” without disclosing the connection with the principal. At a minimum, the firm had “an obligation to disclose the connection immediately and not wait six months after being advised to do so by the Subchapter V trustee.”
Again, Judge Jaime said he had “little difficulty” exercising discretion to deny all compensation and reimbursement under Rule 2014(a) in view of “a connection that was known and not disclosed when the employment application was filed.”
The failure to disclose a simultaneous representation of the corporate debtor’s principal resulted in the denial of all compensation and reimbursement sought by the debtor’s counsel, in an opinion by Bankruptcy Judge Christopher D. Jaime of Sacramento, Calif.
In his April 5 opinion, Judge Jaime explained why he had discretion to deny all compensation and reimbursement under both Section 328(c), for holding an adverse interest, and alternatively, Bankruptcy Rule 2014(a), for failure to disclose “connections” with creditors and parties in interest.
The facts about the law firm’s conflict only dribbled out months after the corporate debtor filed a petition under Subchapter V of chapter 11.
Before bankruptcy, employees had prosecuted a wages and hours lawsuit in state court. The suit resulted in a $485,000 settlement for which the corporate debtor and its principal were both liable.