November 2012 Vol. 9, No. 3


Fed. Rule of Bankruptcy Proc. 2014(a): Disclosures in Application for Employment of Attorney


In re Thomas (N.D.Cal. 2012) 476 B.R. 579


Was bankruptcy court required to disqualify attorney and order attorney to disgorge fees who failed to disclose in his application for employment of attorney in a Chapter 11 case that his retainer was paid by debtors’ son where record revealed that attorney disclosed that information in two separate documents filed with debtors’ bankruptcy schedules, including the Statement of Financial Affairs?


No.  The bankruptcy court’s ruling that it was required to disqualify attorney under those circumstances was error requiring remand. 

The employment of an attorney for a debtor-in-possession in a Chapter 11 case is governed by §327(a) of the Bankruptcy Code and requires approval of the bankruptcy court. To enable the bankruptcy court to evaluate an attorney’s potential for employment, an application for employment of attorney must be accompanied by a verified statement disclosing the attorney’s connections with “the debtors, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.”  (Fed. Rule Bankruptcy Proc. 2014(a).)  “The purpose of such disclosures is to permit the bankruptcy court and parties in interest to determine whether the connection disqualifies the applicant from the employment sought or whether further inquiry should be made before deciding whether to approve the employment.  This decision should not be left to counsel, whose judgment may be clouded by the benefits of the potential employment.”  (476 B.R. at 586, quoting In re Lee (Bankr.C.D.Cal. 1988) 94 B.R. 172, 176.)  The disclosure provision is applied “strictly.”  (476 B.R. at 585, quoting In re Park-Helena (9th Cir. 1995) 63 F.3d 877, 881.)

While the two other documents in which the information about the source of the retainer was disclosed serve purposes different from the application for employment, the bankruptcy court had discretion to consider that disclosure had in fact been made in these other documents in deciding whether disqualification and disgorgement of fees were warranted.  (476 B.R. at 587.)  The bankruptcy’s court’s finding that the attorney had failed to disclose the information in any document was error warranting reversal and remand.  “This error was understandable given the fact that the bankruptcy court decided the attorney’s fees motion on an issue not briefed by the parties, and therefore the retainer disclosure issue was not fully flushed out at the time of the hearing.”  (Id. at 586.)  Since the bankruptcy judge indicated that he may have made a different ruling had he been aware that the information about the source of the retainer had been disclosed in other documents, the matter was remanded for further consideration.  (Id. at 587.)


The U.S. Trustee argued that the bankruptcy court’s order was correct on the alternative ground that the attorney failed to disclose his relationship with, and the substantial involvement in the representation of, an attorney subject to discipline at the time who referred the debtors to the attorney seeking the fees.  The applicant-attorney claimed he was using the disciplined attorney only as an unpaid “courier.”  (Id. at 582, note 1.)  The bankruptcy court had not made a finding on the impact of this relationship, and the failure of the attorney to disclose it, on the attorney’s fee application.  The district court declined to rule on the issue on appeal in the first instance, leaving it to the bankruptcy court to consider the issue on remand.  (Id. at 587.)

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