Ethical Issues in Bankruptcy Practice after the 2005 BAPCPA Amendments
by Claude R. (Chip) Bowles, Jr.
Greenebaum Doll & McDonald, PLLC; Louisville, Ky.
Credit counseling requirements apply to all individuals filing bankruptcy, including chapter 11 individual debtors. See In re Hedquist, __B.R.__ 2006 WL 1042429 (8th Cir. BAP 2006) (credit counseling applies to chapter 11 individual debtors. Court also determined credit counseling provisions did not violate either the 14th Amendment’s right of equal access to courts or 5th Amendment's right of due process); In re Watson, 332 B.R. 740 (Bankr. E.D. Va. 2005).
Read the full outline. (Materials from the 2006 Southeast Bankruptcy Workshop)
2006 Annual Spring Meeting Minutes
A joint meeting of ABI’s Ethics, Professional Compensation and Investment Banking Committees was held on April 22, 2006, in conjunction with the Annual Spring Meeting in Washington, D.C. The panel was moderated by Chip Bowles of Greenebaum Doll & McDonald PLLC and included Francis A. Monaco, Jr. of Monzack and Monaco, PA, Benjamin A. Kahn of Nexson Pruitt & Kleemeir, PA, Judith Greenstone Miller of Jaffe, Raitt, Heuer & Weiss, PC, Anthony Schnelling of Bridge Associates, LLC and Peter S. Kaufman of Gordian Group, LLC. The panel presented “The Three Deadly D’s – Disclosure, Disinterestedness and Disgorgement: How to Get What You Earned and Keep What You Got!”
The presentation began with the new provisions of BAPCPA regarding the requirement that investment bankers be “disinterested.” A manuscript entitled “A Weird New World: Disinterestedness for Investment Bankers under 11 U.S.C. §101(16)” was provided by the panel and is available on ABI’s Web site.
The panel next discussed decisions involving disclosure issues that have required disqualification of counsel and the disgorgement of fees. In particular, the group discussed the decision of the Delaware Bankruptcy Court in In re eToys, Inc. (Bankr. D. Del. 2005), in which debtor’s counsel was ordered to disgorge fees for nondisclosure of counsel’s prior representation of two creditors. Committee counsel also agreed to disgorge $750,000 for failing to disclose its connections with an officer of the debtor. This decision emphasizes the critical importance of thorough investigation and immediate disclosure of all connections that give rise to an actual or potential conflict.
A hot topic of discussion involved the problems in identifying conflicts and what may be considered to be a conflict of interest. Taken to an extreme, the group agreed that even very remote connections of a social or professional nature could present problems in the legal environment today and advised that they should be disclosed to prevent future problems, including the potential loss of significant fees. The use of conflicts counsel was also discussed as a new trend to insulate some professionals from conflicts and avoid disqualification.
Judy Miller’s presentation concerning disgorgement, which focused on the Sixth Circuit’s decision in Specker Motor Sales Co. v. Eisen (6th Cir. 2004) and the more recent decision by Judge James Gregg in In re U.S. Flow (Bankr. W.D. Mich. 2005), was based on her article entitled “Protecting Professionals from Disgorgement - Obtaining Carve-Outs from Secured Creditors to Protect against Uncertainties.” Distributed to all attendees, the article has now been published in the June and July/August 2006 issues of the ABI Journal.
Several other recent decisions involving disgorgement in administratively insolvent cases were discussed, including pending litigation in Midway Airlines (Bankr. E.D.N.C.). Based on the trend in case law, the panel focused on and emphasized the precautions that professionals must take in order to be protected from the risk of disgorgement when there simply isn’t enough money to pay the allowed fees and expenses of all retained professionals. The panel also agreed that it is very difficult for professionals to totally protect themselves from the possible requirement of disgorgement – often imposed by courts as a means of “sharing the pain” – in the event a chapter 11 case becomes administratively insolvent. Nevertheless, obtaining a carve-out from the secured lender may provide at least one means for softening the blow – at least for those lucky enough to obtain such a backstop for their fees.
The committees were able to touch only briefly on the multitude of issues raised by the ever-present challenges faced by retained professionals in getting paid for the services they provide. A more in-depth review of the issues is therefore expected at future programs.
The joint meeting concluded with reminder to all attendees to “get involved” in ABI – through writing, participation in meetings, and all of the other avenues offered through the committee structure and ABI programs.