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Financial Services FLASHPOINTS September 2019

September 13, 2019Print This Post Print This Post

Kevin C. Driscoll, Jr., Barnes & Thornburg LLP, Chicago
312-214-8322 | E-mail Kevin C. Driscoll, Jr.


Employment and Compensation of Professional Persons

One of the first orders that must be obtained in a Chapter 11 proceeding is an order authorizing the debtor to employ the necessary professionals. Failure to obtain an order may mean a denial of compensation for services rendered before the entry of the order. The Bankruptcy Code provides for the employment of professional persons. 11 U.S.C. §327. Section 327(a) regulates the employment of professionals involved with the administration of the case, such as those employed by the trustee or by the committee of unsecured creditors. To be employed under §327(a), the professional must demonstrate that he or she is “disinterested” as that term is defined under Code §101(14). In re Crivello, 134 F.3d 831 (7th Cir. 1998). In pertinent part, a disinterested person is one who “is not a creditor, an equity security holder, or an insider” and who “does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor . . . or for any other reason.” 11 U.S.C. §101(14). The latter portion of the definition, which is commonly referred to as the “catch-all clause,” is sufficiently broad to include any professional with an “interest or relationship that would even faintly color the independence and impartial attitude required by the Code.” Crivello, supra, 134 F.3d at 835. The “other half of the §327(a) requirement [is that the professional not] ‘hold or represent an interest adverse to the estate.’ ” Id., quoting 11 U.S.C. §327(a). See also In re Diamond Mortgage Corporation of Illinois, 135 B.R. 78, 89 (Bankr. N.D.Ill. 1990) (“In addition to the specific requirements of § 327(a), two additional requirements are implied under §327(a): (1) the professional must disclose to the court and the parties in interest all facts which might bear on the professional’s qualification for retention under §327(a) both at the time of the original application and on an ongoing basis; (2) the professional must live up to all requirements of appropriate professional codes of conduct on a continuous basis.” [Emphasis added.]).

A professional may not be employed to represent the debtor if the professional or the professional’s firm currently represents a creditor or holds a claim against the estate. The representation of a creditor in other matters or in the past also has been held to bar employment under §327(a). In re Envirodyne Industries, Inc., 150 B.R. 1008 (Bankr. N.D.Ill. 1993); In re American Printers & Lithographers, Inc., 148 B.R. 862 (Bankr. N.D.Ill. 1992). Before commencing work for the debtor-in-possession or the trustee, the professional’s employment must be authorized by an order from the bankruptcy court. (The Bankruptcy Code uses the term “trustee” synonymously with “debtor-in-possession.”) Failure to obtain such an order before commencing services may lead to a denial of compensation for services rendered. In re Grabill Corp., 983 F.2d 773 (7th Cir. 1993), aff’g Grabill Corp. v. Pelliccioni (In re Grabill Corp.), 135 B.R. 835 (N.D.Ill. 1991), aff’g In re Grabill Corp., 113 B.R. 966 (Bankr. N.D.Ill. 1990). In Pelliccioni, supra, although a motion to employ debtor’s counsel was denied, counsel continued to render services for seven months. A fee petition for the services rendered was denied because the court found there was no equitable basis to grant the fees when a conflict of interest was present. The court, in In re Singson, 41 F.3d 316, 319 (7th Cir. 1994), ruled that although §327(a) and Fed.R.Bankr.P. 2014(a) do not require that the approval of a professional must precede engagement, prior approval is preferred because it permits close supervision of the administration of the estate, wards off “volunteers” seeking financial gain, and avoids duplication of effort.

A professional seeking employment by a trustee or debtor-in-possession must look to Fed.R.Bankr.P. 2014, which requires that the applicant fully disclose all connections with creditors and parties in interest. The application should state the reason the professional services are required, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant’s knowledge, all of the professional’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, or any other person employed in the Office of the United States Trustee. The application must be accompanied by an affidavit attesting to the “disinterestedness” of the applicant that states that the professional holds no “interest adverse to the estate.” In re CF Holding Corp., 164 B.R. 799, 805 – 806 (Bankr. D.Conn. 1994) (“to hold or represent an adverse interest” means (1) to hold or assert any interest that would tend to reduce value of bankruptcy estate or that would give rise to actual or potential dispute in which estate is rival claimant or (2) to possess predisposition under circumstance that render such predisposition bias against estate).

The requirement for complete and full disclosure cannot be overemphasized. Failure to provide full disclosure may be grounds for the denial of a request for professional compensation and even disgorgement of previously paid compensation. See In re Diamond Mortgage Corporation of Illinois, 135 B.R. 78 (Bankr. N.D.Ill. 1990); In re Rusty Jones, Inc., 134 B.R. 321 (Bankr. N.D.Ill. 1991) (counsel’s undisclosed partner’s conflict imputed to firm; denial of 60 percent of fees otherwise allowable). See also In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998); In re Angelika Films 57th, Inc., 227 B.R. 29 (Bankr. S.D.N.Y. 1998). Even though employment may be denied based on the facts disclosed, full disclosure may protect counsel from denial of fees subsequent to bringing an application for compensation. American Printers, supra. Professionals also should be careful to file a supplement with the court if the situation changes and a potential conflict or a relationship emerges. Attorneys and other professionals not regularly appearing in bankruptcy cases and unsure of how much to disclose should err on the side of over-disclosure. Caselaw charges the professional person who seeks appointment pursuant to §327(a) with the responsibility of knowing that approval is necessary and of ensuring that, in fact, it has been sought. See In re F/S Airlease II, Inc., 844 F.2d 99 (3d Cir. 1988). The receipt of any prepetition compensation, prepetition retainers, and prepetition representation of any party connected with the case should be included in the disclosure. (For a thorough discussion of retainers in Illinois, see In re McDonald Bros. Construction, Inc., 114 B.R. 989 (Bankr. N.D.Ill. 1990), and Dowling v. Chicago Options Associates, Inc., 226 Ill.2d 277, 875 N.E.2d 1012, 1021, 314 Ill.Dec. 725 (2007), and the numerous cases that cite to these decisions).

In some situations, counsel may represent a debtor when a fully disclosed conflict is disclosed and “conflict counsel” is authorized. See In re Caesars Entertainment Operating Co., Inc., 561 B.R. 420, 428 (Bankr. N.D.Ill. 2015) (creditors committee supporting use of conflicts counsel).

For more information about financial services, see ELEMENTS OF ILLINOIS LAW: BANKRUPTCY AND COLLECTIONS — 2019 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.


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