United States: Complying With Section 327(a) Of The Bankruptcy Code: What Counsel For A Debtor-In-Possession Need To Know

An attorney appointed to be counsel for a debtor in possession must first attest in a sworn affidavit that he or she does not represent any materially adverse interests to the estate or is not an interested party according to Section 327(a) of the Bankruptcy Code.  Even performing all duties zealously and properly, however, does not immunize the attorney from sanction if the court later finds out that the attorney represents an adverse interest to the estate.  The attorney can not only be disqualified and replaced, but also may be barred from receiving compensation for the legal work already performed. These potential dire outcomes could have a real impact on how forthright attorneys may be in their sworn affidavits to be appointed counsel for the debtor.  If counsel were allowed to receive attorneys' fees even if they intentionally omitted a materially adverse interest, this could create a perverse incentive for lawyers to leave out information knowing that they will get paid nonetheless.  Bankruptcy courts, however, also recognize that any potential sanction must toe the line between deterring intentional concealment and punishing accidental or negligent omissions.

The Bankruptcy Court for the Eastern District of North Carolina confronted this issue in In re: Kimberly Nifong Mitchell, Case No.11-08880-8-ATS (Bankr. E.D. No. Car. 2013) [Doc. No. 294].  There, the court held that the attorney for the debtor in possession was not entitled to fees for services rendered.  The bankruptcy court had granted the debtor's application to employ the petitioner law firm on January 9, 2012.  Later that day, the debtor's financial schedules were amended to show that, shortly before her bankruptcy petition, the debtor conveyed real property worth $640,000 to an LLC.  At the time of that transaction, the law firm had represented Mr. Hamilton, a 50% owner of the LLC.  Mr. Hamilton and the debtor had enjoyed close personal and business relationships with one another.

On the bankruptcy administrator's motion, the court disqualified the law firm from representing the debtor in possession because Mr. Hamilton was clearly an interested party.  The law firm represented Mr. Hamilton, and Mr. Hamilton benefited from the conveyances of real property.  In its defense, the law firm had filed an amended affidavit disclosing its representation of Mr. Hamilton and reiterating that it did not have a conflict of interest.  Additionally, the firm claimed to have prepared an affidavit during the initial application process disclosing the connections between Mr. Hamilton and the debtor, but did not file this affidavit due to administrative error.

A year later, when the law firm filed an application to recover administrative expenses, the court looked to the Sixth and Seventh Circuits for guidance on interpreting Section 328(c) of the Code, which states that a court "may" deny allowance of compensation for professional services where the professional is interested or represents an interested party.  The firm argued that this section gives the court discretion to allow the expenses despite the firm's administrative error.  The bankruptcy administrator argued that, because the initial approval was invalid due to the conflict, the court had no discretion to award administrative expenses.  The Sixth Circuit had interpreted Section 328(c) not to confer discretion to a bankruptcy court where the initial approval of employment was invalid, while the Seventh Circuit reached the opposite conclusion.  Realizing its interpretation might lead to an unintended incentive for attorneys to conceal potential conflicts, the Seventh Circuit counseled that a bankruptcy court should consider whether the omission was intentional and use its discretion in those instances to deny allowance.

In Kimberly, the bankruptcy court adopted the Seventh Circuit's interpretation, but ruled that the law firm in this case was still not entitled to its requested fees.  The court found that an experienced law firm should have known that representing both parties was an actual conflict of interest, and the law firm at minimum should have brought it to the court's attention.  The firm knew about Mr. Hamilton's 50% interest in the LLC, and the real property conveyance made disclosure essential.  The court would not accept the firm's excuse of administrative error because the firm had several opportunities to disclose the conflict and did not do so.  As a result, the court concluded, the firm assumed the risk that it would be disqualified and would not be compensated for the legal work it performed pursuant to a misleading and incomplete affidavit.

This decision and its analysis of persuasive out-of-circuit precedent provide helpful guidance for attorneys and bankrupt entities on how to handle the appointment of legal counsel.  The case suggests that attorneys will be held responsible for the information they knew or should have known at the time of application and left out of their affidavits.  Courts following this precedent would likely not give a sophisticated attorney or powerful law firm the benefit of the doubt when explaining why material information regarding a potential conflict of interest was not provided in the affidavit.  This could result in a reputational hit in disqualification and, worse, denial of all attorney fees earned—regardless of the quality and propriety of the work—during the bankruptcy proceeding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions