American Bankruptcy Institute
50 IV. Proposed Recommendations: Commencing the Case
a more limited view and only disqualify the professional if it holds an interest that is “materially adverse” to the estate.190
Under the current law, debtors in possession will often seek court approval of procedures for retaining and compensating “ordinary course professionals” during the pendency of the chapter 11 case. These procedures typically require the debtor to identify the specific or general types of professionals or service providers covered by the motion and to establish a cap that limits the amounts that can be paid to these entities (usually on a quarterly basis) during the case. Such ordinary course professionals may be required to file a verified statement under Bankruptcy Rule 2014(a), although debtors generally agree to submit quarterly summaries of the fees paid to these professionals. Courts routinely approve motions related to ordinary course professionals to enable a debtor to continue its operations during the chapter 11 case as efficiently as possible.
Other Professionals
The ability of debtors in possession, trustees or other estate representatives, and statutory committees to retain professionals is subject to approval by the court under section 327 of the Bankruptcy Code; the court thereafter reviews and scrutinizes the compensation requests of professionals under section 330. Other parties in the chapter 11 case may also seek reimbursement for, or payment of, their professionals’ fees and expenses from estate funds. These parties include secured creditors, creditors who are parties to an agreement or settlement with the debtor or the trustee, parties to intercreditor agreements, and ad hoc committees.191 In some instances, such as with ad hoc committees, a party may seek payment for its professionals under section 503(b)(3)(D) of the Bankruptcy Code, which permits the payment of the reasonable fees and expenses of “a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case
imposes a per se disqualification as trustee’s counsel of any attorney who has an actual conflict of interest; (2) the district court may within its discretion — pursuant to § 327(a) and consistent with § 327(c) — disqualify an attorney who has a potential conflict of interest and (3) the district court may not disqualify an attorney on the appearance of conflict alone.”); In re Martin, 817 F.2d 175, 182 (1st Cir. 1987) (“The question is not necessarily whether a conflict exists — although an actual conflict of any degree of seriousness will obviously present a towering obstacle — but whether a potential conflict, or the perception of one, renders the lawyer’s interest materially adverse to the estate or the creditors.”) (citation omitted); In re Lease-A-Fleet, Inc., 1992 U.S. Dist. LEXIS 407, at *2 (E.D. Pa. Jan. 15, 1992) (“I reject [the] argument that § 327(e) requires disqualification whenever there is a potential conflict. While some courts hold that simultaneous representation of the debtor and its guarantors is prohibited under § 327(e), such is clearly not the rule in this Circuit.”) (citing In re G&H Steel Service, Inc., 76 B.R. 508, 510 (Bankr. E.D. Pa. 1987)). 190 See, e.g., Beal Bank, S.S.B. v. Waters Edge Ltd. P’ship, 248 B.R. 668, 695 (D. Mass. 2000) (quoting In re Martin, 817 F.2d 175, 182 (1st Cir. 1987)) (“[A]n inquiry does not have to ask ‘whether a conflict exists . . . but whether a potential conflict, or the perception of one renders the lawyer’s interest materially adverse to the estate or the creditors.’”) (citations omitted); In re Leslie Fay Cos. Inc., 175 B.R. 525, 536 (Bankr. S.D.N.Y. 1994) (“[R]etention under section 327 is only limited by interests that are ‘materially adverse . . . .’”) (citations omitted). Notably, section 327(a) of the Bankruptcy Code refers to “an interest adverse to the estate” while section 101(14)(E) refers to “an interest materially adverse to the interest of the estate.” 11 U.S.C. § 327(a). 191 “A lock-up agreement — sometimes referred to as a plan-support agreement or restructuring-support agreement — often serves as an integral component of the bankruptcy process by allowing a debtor and its key creditors to memorialize the resolution of their legal and economic disputes and permit that debtor to attempt to confirm its plan and exit bankruptcy as expeditiously as possible.” Kristopher M. Hansen et al., Post-Petition Lock-Up Agreements and Designation Standards Clarified, Am. Bankr. Inst. J., Apr. 2013, at 30. Ad hoc or unofficial committees play an important role in reorganization cases. By appearing as a ‘committee’ of shareholders, the members purport to speak for a group and implicitly ask the court and other parties to give their positions a degree of credibility appropriate to a unified group with large holdings. Moreover, the Bankruptcy Code specifically provides for the possibility of the grant of compensation to “a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title [an official committee], in making a substantial contribution in a case under chapter 9 or 11 of this title.” In re Nw. Airlines Corp., 363 B.R. 701, 703 (Bankr. S.D.N.Y. 2007) (citing 11 U.S.C. § 503(b) (3)(D)).