-
USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 93-1971
BERNARD P. ROME,
Appellant,
v.
JOSEPH BRAUNSTEIN, ETC.,
Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
___________________
____________________
Before
Selya, Circuit Judge,
_____________
Bownes, Senior Circuit Judge,
____________________
and Cyr, Circuit Judge.
_____________
____________________
Bernard P. Rome, with whom Rome, George & Klein was on brief
_______________ ____________________
for appellant.
Isaac H. Peres, with whom Riemer & Braunstein was on brief
______________ ___________________
for appellee.
____________________
March 22, 1994
____________________
CYR, Circuit Judge. Bernard P. Rome, Esquire, appeals
CYR, Circuit Judge.
_____________
from a district court order entered on intermediate appeal,
affirming a bankruptcy court ruling under Bankruptcy Code
328(c) disallowing Rome's application for fees as court-appointed
counsel to chapter 7 debtor Chestnut Hill Mortgage Corporation
(CHM) due to disqualifying conflicts of interest. Finding no
error, we affirm.
I
I
BACKGROUND
BACKGROUND
__________
As its longtime corporate clerk and counsel, Rome filed
a chapter 11 petition in behalf of CHM in November 1989, followed
by an application for Rome's appointment as counsel to the
chapter 11 debtor in possession pursuant to Bankruptcy Code
1107(a), 11 U.S.C. 1107(a); see also id. 327(a), 11 U.S.C.
___ ____ ___
327(a). Thereafter, as counsel to the debtor in possession,
Rome filed three abortive chapter 11 reorganization plans propos-
ing a 20% dividend to general creditors. Various CHM creditors
successfully resisted these initiatives, however, on the ground
that the plans would unfairly advantage certain CHM insiders
including its president and sole shareholder, Arnold Leavitt, and
Leavitt's family and friends by providing priority repayment
of their prepetition "loans" to CHM. In August 1990, after all
three plans failed to win creditor approval, the bankruptcy court
acceded to creditor demands for the appointment of a chapter 11
trustee, appellee Joseph Braunstein, and to Braunstein's reten-
2
tion of Riemer and Braunstein (R & B) as counsel to the chapter
11 trustee.
Meanwhile, three months before Braunstein's appointment
as the CHM chapter 11 trustee, an involuntary chapter 7 petition
had been filed against Arnold Leavitt. Shortly thereafter, while
still serving as counsel to CHM in its chapter 11 case, and with
bankruptcy court authorization, Rome began to serve as counsel to
Arnold Leavitt in the involuntary chapter 7 proceeding. As
chapter 11 trustee, appellee Braunstein began negotiations with
Rome, by then also representing one Sandra Dickerman, Arnold
Leavitt's secretary at CHM, in her ultimately successful bid to
purchase property belonging to the CHM chapter 11 estate. In
March 1991, less than two months after the bankruptcy court
approved the Dickerman acquisitions from CHM, the CHM chapter 11
proceedings were converted to chapter 7 and Braunstein was
appointed the CHM chapter 7 trustee.
Late in 1991, Braunstein, R & B, and Rome filed appli-
cations for compensation and reimbursement of expenses. The
Braunstein application, as chapter 11 and chapter 7 trustee, and
the R & D application as counsel to the chapter 11 and chapter 7
trustee, approximated $81,000 in fees. The Rome request, as
counsel to CHM qua debtor and chapter 11 debtor in possession,
___
approximated $62,000. The applications were opposed by CHM
creditors; additionally, Braunstein, as the CHM chapter 7 trust-
ee, opposed the Rome application.
3
At the hearing held on these fee applications, Braun-
stein represented to the bankruptcy court that he intended to set
aside certain prepetition transfers of CHM assets as either
preferential or fraudulent. Creditors represented to the court
that Arnold Leavitt had "looted" CHM prior to Rome's filing of
the CHM chapter 11 petition, by transferring CHM assets to
Leavitt family members, and that Rome, in an effort to further
Leavitt's interests at the expense of CHM and its creditors,
repeatedly "obstructed" creditor efforts to investigate CHM's
financial condition and to promote its reorganization. The
bankruptcy court ultimately allowed the Braunstein and R & B fee
applications in full. On the other hand, the court disallowed
the Rome application entirely, on two grounds: (1) Rome's
contentious tenure as counsel to the debtor in possession "pro-
duced virtually no benefit to creditors and loan participants";
and (2) Rome's concurrent representation of CHM and Leavitt, as
well as CHM and Dickerman, was "patently inappropriate." The
district court affirmed.
II
II
DISCUSSION
DISCUSSION
__________
The Bankruptcy Code imposes particularly rigorous
conflict-of-interest restraints upon the employment of profes-
sional persons in a bankruptcy case.
Except as otherwise provided in this section,
the trustee, with the court's approval, may
____ ___ _______ ________
employ one or more attorneys, accountants,
4
appraisers, auctioneers, or other profession-
al persons, that do not hold or represent an
_________
interest adverse to the estate, and that are
________ _______ ___
disinterested persons, to represent or assist
_____________ _______
the trustee in carrying out the trustee's
duties under this title.
Bankruptcy Code 327(a), 11 U.S.C. 327(a) (emphasis added).
See Fed. R. Bankr. P. 2014; In re Cropper Co., 35 B.R. 625, 629-
___ _________________
30 (Bankr. M.D. Ga. 1983) (noting "strict standards" unique to
bankruptcy); see also Bankruptcy Code 1107(a), 11 U.S.C.
___ ____
1107(a) ( 327(a) applicable to counsel representing debtor in
possession); In re Roberts, 46 B.R. 815, 822 (Bankr. D. Utah
______________
1985). Moreover, as the bankruptcy court is invested with ample
power to deter inappropriate influences upon the undivided
loyalty of court-appointed professionals throughout their tenure,
__________ _____ ______
the need for professional self-scrutiny and avoidance of con-
flicts of interest does not end upon appointment. The court "may
___
deny allowance of compensation . . . if, at any time during such
__ ___ ____
. . . employment . . . , such professional person is not a
disinterested person, or represents or holds an interest adverse
__________ ________ _______
to the interest of the estate . . . ." Bankruptcy Code 328(c),
11 U.S.C. 328(c) (emphasis added). Thus, section 328(c)
authorizes a "penalty" for failing to avoid a disqualifying
conflict of interest. See S. Rep. No. 989, 95th Cong., 2d Sess.
___
39 (1978).
5
Although the Code idiom "interest adverse" is not
defined,1 the companion requirement that appointees be "dis-
interested" is defined, see Bankruptcy Code 101(14), 11
___
U.S.C. 101(14), as including, inter alia, one who is "not a
_____ ____
creditor, an equity shareholder, or an insider," nor presently,
___
or "within two years before [bankruptcy], a[n] . . . officer
_______
. . .of the debtor," and does not have "an interest materially
___ ________ __________
adverse to the interest of the estate or of any class of credi-
_______
tors or equity security holders" for "any reason." Id. (emphasis
___
added); see In re Martin, 817 F.2d 175, 179 (1st Cir. 1987).
___ _____________
These statutory requirements disinterestedness and no interest
adverse to the estate serve the important policy of ensuring
that all professionals appointed pursuant to section 327(a)
tender undivided loyalty and provide untainted advice and assis-
tance in furtherance of their fiduciary responsibilities.2
____________________
1However, an "adverse interest" has been described in
pragmatic terms as the "possess[ion] or assert[ion] [of] mutually
exclusive claims to the same economic interest, thus creating
either an actual or potential dispute between rival claimants as
to which . . . of them the disputed right or title to the inter-
est in question attaches under valid and applicable law; or (2)
[the possession of] a predisposition or interest under circum-
stances that render such a bias in favor of or against one of the
entities." In re Roberts, 46 B.R. at 826-27.
_____________
2Rome argues on appeal that he not only disclosed his
position as the clerk of CHM but could reasonably have believed
that such a ministerial position would not make him a corporate
"insider" within the meaning of Bankruptcy Code 101(31), 11
U.S.C. 101(31). We express no view on these claims, and
confine our holding to Rome's impermissible representation of two
other clients (Leavitt and Dickerman) with "interests adverse" to
the CHM estate which he was responsible for representing by court
appointment.
6
In the exercise of its own ongoing affirmative respon-
sibility to "root out impermissible conflicts of interest" under
Bankruptcy Code 327(a) and 328(c), the bankruptcy court must
determine whether any competing interest of a court-appointed
professional "created either a meaningful incentive to act
contrary to the best interests of the estate and its sundry
creditors an incentive sufficient to place those parties at
more than acceptable risk or the reasonable perception of
____ ____ __________ ____ __________ __________
one." Martin, 817 F.2d at 180 (emphasis added). The test is
______
neither subjective, nor significantly influenced by the court-
appointed professional's "protestations of good faith," as Rome
would have it, see, e.g., supra note 2, but contemplates an
___ ____ _____
objective screening for even the "appearance of impropriety."
Id. at 180-81, 182. Finally, if its fact-specific inquiry leads
___
the bankruptcy court to conclude that an impermissible conflict
of interest looms or exists, available sanctions include disqual-
ification and the denial or disgorgement of all fees. Id. at
___
182-83. See Bankruptcy Code 328(c), 11 U.S.C. 328(c). We,
___
like the district court, will then review the bankruptcy court's
factual findings for clear error and its conclusions of law de
__
novo. In re La Roche, 969 F.2d 1299, 1301 (1st Cir. 1992).
____ ______________
The bankruptcy court determined that Rome improperly
represented two undisclosed "interest[s] adverse" to the CHM
chapter 11 estate Arnold Leavitt and Sandra Dickerman
resulting in actual conflicts of interest warranting Rome's
retroactive disqualification and forfeiture of all compensation
___________
7
from the chapter 11 estate. Rome raises three principal chal-
lenges to the bankruptcy court ruling.
A. The Duty of Disclosure
A. The Duty of Disclosure
______________________
First, Rome argues that retroactive disqualification
is inequitable in these circumstances, since the bankruptcy court
and the trustee tacitly endorsed his representation of Leavitt
and Dickerman, pendente lite, or, at the very least, voiced no
________ ____
objection until the filing of his application for compensation in
December 1991. Given the relevant findings in this case, howev-
er, we are not swayed by Rome's resort to general notions of
equity.
Although the bankruptcy court has an affirmative duty
to exercise vigilance in avoiding impermissible conflicts of
interest on the part of court-appointed professionals, see, e.g.,
___ ____
In re Anver Corp., 44 B.R. 615, 617 (Bankr. D. Mass. 1984) (once
__________________
alerted to potential conflict of interest on part of appointed
counsel, the bankruptcy court must raise the issue, sua sponte,
___ ______
in order to safeguard its institutional integrity), normally the
professional, especially counsel, possesses ready access to, if
not full awareness of, the facts material to any existing or
potential competing interest which might conflict with the
interests court-appointed counsel must represent, or those which
might generate an unacceptable appearance or risk of conflict.
As with other prophylactic ethical rules constraining
attorney conduct, sections 327(a) and 328(c) cannot achieve their
purpose unless court-appointed counsel police themselves in the
8
first instance, especially in circumstances such as these, where
the nominal applicant (CHM) for Rome's appointment is a corporate
debtor in possession who can only act through its officers and
agents here Leavitt, Rome, and Dickerman and may not
___ ___
command the appointee's primary loyalty. See In re Roberts, 46
_______ ___ ___________ _______ _______ ___ ______________
B.R. at 837-39, 846 (duty of disclosure and disallowance of
compensation under 327(a) and 328(c) are designed to "prevent
'the dishonest practitioner from [engaging in] fraudulent con-
duct, and to preclude the honest practitioner from putting
himself in a position where he may be required to choose between
conflicting duties'") (citation omitted). Thus, as soon as
counsel acquires even constructive knowledge reasonably suggest-
ing an actual or potential conflict, see id. at 839 (fiduciary
___ ___
duty of disclosure arises as soon as counsel becomes "aware" of
facts), a bankruptcy court ruling should be obtained. See, e.g.,
___ ____
In re Martin, 817 F.2d at 182 ("There must be at a minimum full
_____________ __ _ _______
and timely disclosure of the details of any given arrangement.
_______
Armed with knowledge of all the relevant facts, the bankruptcy
_________ ___
court must determine, case by case, whether [a conflict ex-
____ __ ____
ists].") (emphasis added); see also In re Huddleston, 120 B.R.
___ ____ ________________
399, 400-01 (Bankr. E.D. Tex. 1990) ("The case law is clear that
the burden of disclosure is upon 'the person making the statement
[of qualification for employment] to come forward with facts
pertinent to eligibility and to make candid and complete disclo-
sure.' . . . '[T]his decision should not be left to counsel,
whose judgment may be clouded by the benefits of the potential
9
employment.'") (citations omitted); In re O'Connor, 52 B.R. 892,
_______________
894 (Bankr. W.D. Okla. 1985) (counsel, who disputed existence of
disqualifying conflict, requested court's "instructions on how
[to] proceed").3
Absent the spontaneous, timely and complete disclosure
required by section 327(a) and Fed. R. Bankr. P. 2014(a), court-
appointed counsel proceed at their own risk. See, e.g., In re
__ _____ ___ ____ ___ ____ _____
Roger J. Au & Son, Inc., 71 B.R. 238, 242 (Bankr. N.D. Ohio 1986)
_______________________
(failure to disclose facts material to potential conflict may
provide totally independent ground for denial of fees, quite
_______ ___________
apart from the actual representation of competing interests); In
__
re Thompson, 54 B.R. 311, 317 (Bankr. N.D. Ohio 1985) (same); In
___________ __
re Whitman, 51 B.R. 502, 507 (Bankr. D. Mass. 1985) (same); In re
__________ _____
Guy Apple Masonry Contractors, Inc., 45 B.R. 160, 163 (Bankr. D.
____________________________________
Ariz. 1984) (same); see also In re Kendavis Indus. Int'l, Inc.,
___ ____ __________________________________
91 B.R. 742, 748-49 (Bankr. N.D. Tex. 1988) (summarizing legisla-
tive history of 327(a) and 330, noting congressional concern
____________________
3Of course, disclosure of facts suggesting a conflict is not
invariably followed by disqualification. In special circumstanc-
es, for example, the bankruptcy court could determine, in the
sound exercise of its discretion, that any potential impairment
of its institutional integrity, or risk of divided loyalty by
counsel, was substantially outweighed by the benefits to be
derived from counsel's continued representation of multiple
entities or the impracticability of disentangling multiple
interests "without unreasonable delay and expense." In re Hoff-
___________
man, 53 B.R. 564, 566 (Bankr. W.D. Ark. 1985). See In re O'Con-
___ ___ ____________
nor, 52 B.R. at 895 (noting countervailing interest in "curtail-
___
ment of administrative expenses" where potential for conflict is
dormant or remote). In no event, however, may counsel presume
_______
dispensation from the full disclosure required by 327(a) or the
sanctions authorized under 328(c). See also Fed. R. Bankr. P.
___ ____
2014(a).
10
that in earlier corporate reorganization proceedings "the finan-
cial well-being of investors and the public [had been] sacrificed
to the [corporate] insiders' desire for protection and for
profit"). Thus, Rome's failure to make full and spontaneous
disclosure of the financial transactions among CHM, Leavitt, and
Leavitt's family members shortly before Rome filed the CHM
chapter 11 petition, see infra note 5 (and accompanying text);
___ _____
see also Fed. R. Bankr. P. 2014(a), and to obtain explicit court
___ ____
authorization to represent Dickerman, provided sufficient ground
for the discretionary denial of compensation under section
328(c).
B. The Risk Posed by Competing Interests
B. The Risk Posed by Competing Interests
_____________________________________
Second, in a bid to vindicate his failure to disclose,
Rome claims there was no potential conflict of interest since
Leavitt's and Dickerman's interests were never "adverse" to those
of the chapter 11 estate.
1. The Leavitt Interests
1. The Leavitt Interests
_____________________
Rome argues that section 327(a) does not absolutely
prohibit concurrent representation of a corporate debtor in
possession and its sole shareholder, absent evidence affirma-
tively demonstrating an "actual" as distinguished from a
"potential" conflict of interest. Moreover, there could have
been no "actual" conflict, he suggests, because: (1) between
December 1989 and May 1990, Rome did not represent Leavitt; (2)
between May 1990, when the involuntary chapter 7 petition was
11
filed against Leavitt, and August 1990, when Braunstein was
appointed the CHM chapter 11 trustee, it was not Rome but the
chapter 7 trustee who represented the Leavitt chapter 7 estate;
and (3) none of the transfers from CHM to Leavitt prior to CHM's
chapter 11 petition have yet been proven improper, preferential
or fraudulent. These arguments are specious.
The fact that Rome did not represent Leavitt until May
1990 is immaterial, since section 328(c) expressly empowers the
bankruptcy court to disallow compensation if court-appointed
counsel, "at any time," is either not a "disinterested" person
"or represents or holds an interest adverse to the interest of
the estate with respect to the matter on which [counsel] is
employed." Bankruptcy Code 328(c), 11 U.S.C. 328(c). Rome's
post-May 1990 representation of chapter 7 debtor Leavitt, against
whom the CHM chapter 11 estate also represented by Rome
held claims for the avoidance of alleged preferential and fraudu-
lent transfers, created a clear conflict of interest without
_______
regard to whether the Leavitt chapter 7 estate itself was repre-
______ __ _______ ___ _______ _______ _ ______ ______ ___ ______
sented by a trustee in bankruptcy. After all, Rome sought
______ __ _ _______ __ __________
compensation for services rendered to the CHM chapter 11 estate,
__ ___ ___ _______ __ ______
not to Leavitt, the chapter 7 debtor. Cf. In re Hoffman, 53 B.R.
___ _____________
564, 565 (Bankr. W.D. Ark. 1985) ( 327(a) is inapplicable to
appointment or compensation of counsel to chapter 7 debtor). Yet
Rome's representation of Leavitt in the involuntary chapter 7
proceeding plainly undermined confidence in Rome's ability to
provide impartial advice to the CHM estate relating to the
12
prospects for recovering the alleged prepetition transfers to
Leavitt and Leavitt family members.
As concerns Rome's third contention that no trans-
fers from CHM to Leavitt prior to CHM's chapter 11 petition have
yet been proven improper, preferential or fraudulent we are
______
bound by the bankruptcy court's factual findings unless clearly
erroneous. See In re La Roche, 969 F.2d at 1301; In re Martin,
___ ______________ ____________
817 F.2d at 182-83 (noting that "[t]he bankruptcy judge is on the
front line, in the best position to gauge the ongoing interplay
of [ 327(a)] factors and to make the delicate judgment calls
which such a decision entails"); In re Huddleston, 120 B.R at
________________
402-03 (favoring case-by-case analysis). And since section
327(a) is designed to limit even appearances of impropriety to
the extent reasonably practicable, doubt as to whether a particu-
lar set of facts gives rise to a disqualifying conflict of
interest normally should be resolved in favor of disqualifica-
tion. Cf. In re Freedom Solar Ctr., Inc., 776 F.2d 14, 17 (1st
___ _______________________________
Cir. 1985).4
Even if we were to set to one side Rome's unexplained
failure at the outset to apprise the bankruptcy court of facts
that might generate an appearance of impropriety, the bankruptcy
_____
court's section 328(c) ruling is well supported by the record.
____________________
4Although In re Freedom Solar involved an application of the
___________________
Maine Bar Rules in a bankruptcy proceeding, we cite to it throug-
hout this opinion in contexts legitimately informed by its
closely analogous discussion. See, e.g., In re Kendavis, 91 B.R.
___ ____ ______________
at 752 ("The Bankruptcy Code provisions dealing with conflicts of
interest find their counterparts in the ABA Code of Professional
Responsibility."); In re Roberts, 46 B.R. at 829-37 (same).
_____________
13
As the bankruptcy court was informed at the hearing on the fee
applications, see supra at p. 4, CHM creditors had commissioned
___ _____
the Peterson Report, a pre-chapter 11 investigation into CHM's
financial condition, which disclosed that Arnold Leavitt had
caused large prepetition transfers from the CHM treasury to
himself and immediate family members.5 In addition, Rome had
shown considerable intransigence to efforts by Peterson to obtain
access to certain CHM records, even informing Peterson that
access must await "litigation" and "discovery." See In re
___ ______
Martin, 817 F.2d at 182 (noting relevance of "adverse" interests
______
which threaten "to hinder or to delay the effectuation of a
[reorganization] plan"); cf. In re Freedom Solar, 776 F.2d at 16
___ ___________________
(noting shareholder interest "in delaying the turnover of the
assets [in order] to use his possession of them as a negotiating
chip, while the debtor's interest was in cooperating with the
trustee to achieve the swiftest resolution possible"); In re
______
Kendavis, 91 B.R. at 750-51 (describing counsel's resort to
________
dilatory "scorched earth" tactics in behalf of insiders "adverse"
to debtor). Coupled with the preferential "insider" terms
proposed in the three CHM chapter 11 reorganization plans Rome
presented to CHM creditors, his continued participation promoted
____________________
5Appellee Braunstein, the CHM chapter 7 trustee, represented
to the bankruptcy court that he had objected to Leavitt's chapter
7 discharge, and was preparing to initiate an adversary proceed-
ing against Leavitt's wife and son to recover an automobile
allegedly transferred to Leavitt by CHM a few months before Rome
filed the chapter 11 petition in behalf of CHM. Cf. In re
___ ______
Freedom Solar, 776 F.2d at 17 (potential adverse interest looms
______________
where shareholder of corporate debtor may have received preferen-
tial transfer).
14
the readily foreseeable perception that he was attempting to
insulate Leavitt's personal and family financial interests at the
expense of the CHM chapter 11 estate and its creditors. See id.
___ ___
at 750 (internal corporate communication suggested that attorneys
improperly represented family controlling debtor corporation, and
not their client of record the debtor); In re Hoffman, 53 B.R.
_____________
at 565 (first loyalty of corporate debtor's counsel must lie with
corporation, not with its individual officers).
2. The Dickerman Interests
2. The Dickerman Interests
_______________________
Rome argues, in a similar vein, that after Braunstein's
appointment as the CHM chapter 11 trustee in August 1990,
Braunstein alone represented CHM's interests. Thus, as a matter
__ _ ______
of law, there could have been no disqualifying "conflict of
__ ___
interest" in Rome's concurrent representation of Dickerman in her
successful purchase of CHM's assets. Moreover, even as a factual
matter, he argues, there could have been no actual conflict
because Dickerman was the only bidder and the sale benefited both
____
buyer and seller.
As with other arguments insistently advanced by Rome,
this one presupposes that there can be no disqualifying conflict
absent proof of actual loss or injury. On the contrary, simulta-
______ ____ __ ______
neous representation of the buyer and the seller in the same
transaction is a prototypical disqualifying conflict of interest
even if it is not invariably disqualifying in all circumstances.
See In re Tidewater Memorial Hosp., Inc., 110 B.R. 221, 228-29
___ _____________________________________
(Bankr. E.D. Va. 1989) ("[D]ouble representation [in acquisition
15
of debtor's assets] can be allowed, if at all, only under the
strictest adherence to the statute and regulations," including
full disclosure.). Even if Dickerman was the highest bidder for
__________
these CHM assets, or even the only one, Rome's longtime position
as corporate clerk and counsel to CHM, both prepetition and
postpetition, presumably afforded him unique access to inside
information concerning the nature and value of its assets,
information that Rome could have used (or been tempted to use) to
enable his other client Dickerman to submit a better
calibrated bid than arm's-length bidders could venture, thereby
potentially chilling bidding at the expense of CHM and its
creditors. Cf. In re Freedom Solar, 776 F.2d at 16 (corporate
___ ____________________
debtor's shareholder had legitimate interest in buying assets at
lowest possible price; debtor in selling at highest price).
Furthermore, counsel to a chapter 11 debtor owes continuing
______
loyalty to the debtor throughout the chapter 11 proceedings;
______
appointment of a chapter 11 trustee does not end counsel's
obligation to the debtor entity. See id. at 18 (noting that
______ ______ ___ ___
"[f]ederal law imposes enduring duties on the debtor . . . [and]
[i]n these situations, the debtor needs real representation and
advice"; ethical rules are designed "to avoid the possibility
that [the attorney] will succumb to temptation and give tainted
advice"). In our considered view, therefore, Rome's unauthorized
representation of Dickerman generated a palpable appearance and
risk of divided loyalties, see In re Thompson, 54 B.R. at 316,
___ ______________
16
placing the CHM estate at "more than acceptable risk," In re
_____
Martin, 817 F.2d at 180.
______
C. Severity of Sanction
C. Severity of Sanction
____________________
Finally, Rome argues, even if the bankruptcy court
supportably determined that he represented "adverse" interests
that should have been disclosed ab initio, the most it should
__ ______
have done is reduce his compensation since there is no evidence
that any conflict of interest, however suspect in appearance,
actually harmed the chapter 11 estate or its creditors, and the
________
trustee concedes that Rome provided "valuable services" to the
estate.6
An attorney retained pursuant to section 327(a) assumes
a fiduciary responsibility to refrain from rendering any unautho-
rized service in furtherance of an interest adverse to the client
he serves by court appointment. See In re Kendavis, 91 B.R. at
___ ______________
753 (citing Wolf v. Weinstein, 372 U.S. 633, 641 (1963)). "A
____ _________
fiduciary . . . may not perfect his claim to compensation by
insisting that, although he had conflicting interests, he served
his several masters equally well or that his primary loyalty was
not weakened by the pull of his secondary one." Woods v. City
_____ ____
Nat'l Bank & Trust Co., 312 U.S. 262, 269 (1941); In re Roger J.
_______________________ ______________
____________________
6We need not address Rome's argument that it was inequitable
to allow the Braunstein and R & B fee applications in full, yet
disallow Rome's application in full. Rome informed the bankrupt-
cy court that he was "not opposed" to the Braunstein and R & B
fee applications. Hence, the reasonableness of the former
ruling is an issue which has been waived. See Mark Bell Furni-
___ ________________
ture Warehouse, Inc. v. D.M. Reid Assocs., Ltd. (In re Mark Bell
_____________________ _______________________ _______________
Furniture Warehouse, Inc.), 992 F.2d 7, 9 (1st Cir. 1993).
_________________________
17
Au, 71 B.R. at 241. Especially where there has been a clear
__
failure to make timely and spontaneous disclosure of all facts
material to a disqualifying conflict of interest, counsel ap-
pointed pursuant to section 327(a) can lay no claim of right to a
_____ __ _____ __ _
lesser sanction than the bankruptcy court is authorized to impose
______ ________
pursuant to section 328(c).
Like other courts which have considered the issue,
however, we adopt no per se or brightline rule invariably
___ __
requiring denial of all compensation under section 328(c).7
_________
Nevertheless, based on its familiarity with the CHM proceedings,
the bankruptcy court in this case acted well within its discre-
tion in finding that Rome's services "produced virtually no
benefit." See, e.g., Bankruptcy Code 330(a)(1), 11 U.S.C.
___ ____
330(a)(1) (compensation may be based on assessment of "the
value of such services"); In re Kendavis, 91 B.R. at 762 (reduc-
______________
ing fees by 50% for conflict of interest, but citing "exceptional
circumstances"); In re Whitman, 51 B.R. at 506 (noting that
_______________
"results obtained" are relevant consideration). Furthermore,
where court-appointed counsel has served under an undisclosed
____________________
7See, e.g., In re Kendavis, 91 B.R. at 762 (general rule
___ ____ _______________
favors total denial of compensation, but equities may allow
lesser sanction as facts warrant); In re Roger J. Au, 71 B.R. at
_________________
242-43 (since 328(c) says "may deny," the bankruptcy court
retains discretion to depart from general rule of total denial,
where equities demand); In re GHR Energy Corp., 60 B.R. 52, 68
_______________________
(Bankr. S.D. Tex. 1985) (penalty for 327(a) conflict may be
adjusted to reflect gravity of breach); In re Roberts, 46 B.R. at
_____________
846-48, 850 (same, noting that bankruptcy court is court of
equity). But cf. In re Chou-Chen Chems., Inc., 31 B.R. 842, 850-
___ ___ ____________________________
51 (Bankr. W.D. Ky. 1983) (favoring denial of all compensation if
conflict exists, regardless of benefit from services rendered).
18
disqualifying conflict of interest, the bankruptcy court cannot
always assess with precision the effect the conflict may have had
either on the results achieved or the results that might have
been achieved by following "the road not taken." See Woods, 312
___ _____
U.S. at 269 ("[T]he incidence of a particular conflict of inter-
est can seldom be measured with any degree of certainty [and
[t]he bankruptcy court need not speculate as to [] the result of
the conflict . . . ."); In re Tidewater, 110 B.R. at 229 (denying
_______________
compensation even though there was "[n]o doubt the law firm
performed valuable services in the chapter 11 case").8 Yet as
an appellate court, we are poorly positioned to second-guess a
bankruptcy court's judgment call in these circumstances, and
neither we nor the district court have been shown any reason for
doing so in the present case.
The district court judgment is affirmed.
The district court judgment is affirmed.
_______________________________________
____________________
8For example, the bankruptcy court observed that Rome's role
as counsel to CHM, qua debtor in possession, generated vigorous
___
opposition to all three reorganization plans, as well as unusual-
ly intense antagonism from CHM's general creditors (including
Rome's longtime law partner). The clear implication, unverifi-
able in hindsight, is that CHM's reorganization prospects may
have been better but for Rome's insistence on serving three
clients simultaneously in these proceedings. In re Kendavis, 91
_______________
B.R. at 748 ("[E]thical violations or conflicts of interest may
lessen the value of services. If an attorney holds an undis-
closed adverse interest, a court is empowered to deny all compen-
sation.") (citation omitted); In re Whitman, 51 B.R. at 507
_______________
(same). Retrospective damage assessments are made all the more
difficult where counsel has labored under several simultaneous
conflicts of interest.
19
Document Info
Docket Number： 93-1971
Filed Date： 3/22/1994
Precedential Status： Precedential
Modified Date： 9/21/2015