It is not uncommon for an individual to need the help of multiple attorneys at the same time. Many individuals who are involved in a bankruptcy case are also involved in other litigation, which may include: personal injury, contract disputes, and marital/child support lawsuits. In addition, business debtors usually have a Certified Public Accountant or some other professional bookkeeper who manages the accounts and records for the business. The hiring of these professionals are subject to Bankruptcy Court approval.
I. The Process
Once an individual is involved in a bankruptcy case, all other professionals that the debtor retains after the commencement must be court approved. The process is not difficult and an Application for Retention can be filed by the debtor’s bankruptcy attorney. Section 327 of the Bankruptcy Code governs employment of professionals. The application must be accompanied by an affidavit signed by the professional, in accordance with Bankruptcy Rule 2014, setting forth, among other things, all of the professional’s connections with the debtor, creditors, other parties-in-interest, their attorneys and accountants, and the U.S. Trustee’s office.
The application should state the terms and conditions of the employment agreement, including the amount of the retainer received for bankruptcy-related services, the hourly rate or fee, and any other relevant charges. The application should be accompanied by a declaration showing the professional complies with the requirements of 11 U.S.C. §§ 101(14), 327, 329, or 1103(b) and Bankruptcy Rules 2014, 2016, and 5002.
After the professional is retained, all settlements that stem from the litigation must be approved by the Bankruptcy Court through a Motion to Approve Settlement. An Application for Compensation of Professional is also needed for the professional to collect their fees for the work they completed during the bankruptcy. The Application for Compensation should comply with 11 U.S.C. §§ 328, 329, 330 and 331 as well as Bankruptcy Rules 2002, 2016, and any applicable Local Rules. It is important to advise your bankruptcy attorney of all currently retained professionals as well as any potential future retention. The most important step is to make sure the professional is not owed any pre-bankruptcy fees for services as they then may be subject to disqualification.
II. Avoiding Disqualification
If the professional was working for the debtor prior to the bankruptcy filing, and fees are owed, the professional is also a creditor. A subsequent application to retain that same professional creates a conflict as that professional is not disinterested and therefore adverse to the debtor. Section 101(14)(C) of the Bankruptcy Code defines “disinterested person” as someone lacking an interest materially adverse to the interests of the estate, equity security holder, or any class of creditors.
The Third Circuit’s decision in In re Pillowtex, 304 F.3d 246 (3d Cir. 2002), is the seminal case in this jurisdiction and provides guidance on whether a professional holds an interest adverse to the debtor as a result of being a pre-petition creditor. In Pillowtex, the debtor paid $1 million to its future bankruptcy counsel within the 90-day period prior to filing chapter 11. Due to the fact that bankruptcy counsel’s pre-petition fee payment was subject to an avoidance action, the law firm was a potential creditor and therefore did not meet the “disinterested person” requirement. The court disqualified the firm and all of the fees it had earned became subject to disgorgement. This situation can also arise in a business bankruptcy with the debtor’s accountant. Sometimes businesses have accountants on a monthly retainer or owe the accountant for prior work that was completed. If this is the case, the accountant is a pre-petition creditor and cannot subsequently be retained in the bankruptcy proceeding unless they are willing to forgo the pre-petition fees that they are owed.
If you are seeking representation in a New Jersey bankruptcy proceeding, retaining a competent attorney is crucial. It is important to choose an attorney that you are comfortable with and whom will answer all of your questions. If you are seeking representation, please give us a call for a free consultation. We have office locations in Wayne, Hoboken, Newark, and Hackensack.
Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.