Harold & Williams Development Co., In re

• Decision Date: 20 October 1992
• Docket Number: No. 92-1034,92-1034
• Parties: , 23 Bankr.Ct.Dec. 957, Bankr. L. Rep. P 74,943 In re HAROLD & WILLIAMS DEVELOPMENT COMPANY, a/k/a Albert E. Harold, a/k/a A.E. Harold & Son, Debtor. HAROLD & WILLIAMS DEVELOPMENT COMPANY, a/k/a Albert E. Harold, a/k/a A.E. Harold & Son, Plaintiff-Appellant, v. UNITED STATES TRUSTEE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 906

977 F.2d 906

61 USLW 2298, 23 Bankr.Ct.Dec. 957, Bankr.

L. Rep. P 74,943

In re HAROLD & WILLIAMS DEVELOPMENT COMPANY, a/k/a Albert E.

Harold, a/k/a A.E. Harold & Son, Debtor.

HAROLD & WILLIAMS DEVELOPMENT COMPANY, a/k/a Albert E.

Harold, a/k/a A.E. Harold & Son, Plaintiff-Appellant, v. UNITED STATES TRUSTEE, Defendant-Appellee.

No. 92-1034.

United States Court of Appeals, Fourth Circuit.

Argued July 6, 1992.

Decided Oct. 20, 1992.

Harry William Jernigan, III, Harry W. Jernigan, P.C., Virginia Beach, Va., argued (Linda E. Salmon, on the brief), for plaintiff-appellant.

Clifford Joseph White, III, Asst. U.S. Trustee, Rockville, Md., argued (Martha L. Davis, General Counsel, John E. Waites, U.S. Trustee, Debera F. Conlon, Asst. U.S. Trustee, James T. Lloyd, Jr., Office of the U.S. Trustee, Norfolk, Va., on the brief for defendant-appellee.

Before WILKINS, NIEMEYER, and HAMILTON, Circuit Judges.

OPINION

NIEMEYER, Circuit Judge:

In the Chapter 11 bankruptcy proceeding of Harold & Williams Development Company, the bankruptcy court was presented with a request to approve the appointment of one person to serve as both lawyer and accountant for the debtor in possession pursuant to 11 U.S.C. § 327. Purporting to establish what appears to be a per se rule against such dual roles in all bankruptcy cases, the bankruptcy court denied the request. On appeal, the district court refused to affirm a per se rule because, it observed, there may be "rare instances" in which the appointment of one person might serve the best interest of the estate. The district court nevertheless affirmed the bankruptcy court's ruling, noting that the decision under § 327 rests within the discretion of the bankruptcy court and concluding, "In this case the bankruptcy court found dual representation to be inappropriate and we agree."

We agree with the district court that the approval or disapproval of an application for dual representation pursuant to § 327 is committed to the discretion of the bankruptcy court. In the instant case, however, the bankruptcy court did not evaluate the particular circumstances and exercise its discretion in reaching a decision, relying instead on what appears to be a per se rule. We therefore reverse and remand for consideration under the proper standard.

I

On January 17, 1990, Harold & Williams Development Company filed a petition for bankruptcy protection under Chapter 11 of the Bankruptcy Code. It continued thereafter to operate its business and manage its property as a debtor in possession of the bankruptcy estate pending reorganization under Chapter 11.

In March 1990 the debtor petitioned the bankruptcy court in accordance with 11 U.S.C. § 327 for approval of its decision to hire Harry W. Jernigan, III to represent the bankruptcy estate in the dual capacities of attorney and accountant. Jernigan is licensed and qualified to accept employment as a certified public accountant, practicing accounting under the firm name of Harry Jernigan, C.P.A., P.C., and as an attorney in the Commonwealth of Virginia, practicing law under the firm name of Harry W. Jernigan, P.C.

The bankruptcy court conducted a hearing on the employment petition in May 1990. There, the United States Trustee argued against employing Jernigan as both counsel and accountant for the estate because of the "potential for a conflict" between "the accountant's duty to disclose and the attorney's duty to zealously represent" the client. In response, Jernigan stated that the accounting work to be done for the debtor consisted only of "summarizing their receipts and disbursements into the format as required by the bankruptcy proceedings for the monthly financial reports, and the format specified by the trustee's office, and preparing tax returns," which is, according to Jernigan, a type of work often done by law firms. Because of the nature of the accounting tasks involved, and the expected simplicity of the bankruptcy proceeding itself, the debtor argued that it was unlikely that any conflict of interest would result from the accounting work that would preclude him from acting as the debtor's lawyer.

At the conclusion of the hearing the bankruptcy court approved the employment of Jernigan as attorney for the debtor but deferred action on the request to employ him also as accountant. The court ultimately refused to approve Jernigan's appointment as accountant, noting the "inherent potential for conflict between the two types of professionals" and the possibility of "serious problems of disclosure" resulting from the existence of an attorney-client privilege but lack of an equivalent privilege for discussions between accountants and their clients. The bankruptcy court concluded:

I have discussed my concerns with the other bankruptcy judges of the eastern district of Virginia, and they are all in agreement with my conclusion that in a bankruptcy case the positions of attorney and accountant should not be filled by the same person.

The debtor appealed to the district court, asking for reversal on the grounds that neither Virginia law nor 11 U.S.C. § 327 supports a per se rule against dual attorney-accountant representation of a debtor in possession. The district court agreed that the "appointment of a single individual to be both the attorney and the accountant would [not] always be inappropriate." However, basing its decision on the "numerous ... problems that could arise" as a result of dual employment in the usual bankruptcy case, the district court determined that the bankruptcy court did not abuse its discretion in denying the requested approval of employment in this case because the debtor had not sufficiently demonstrated this to be one of the "rare instances" in which dual employment was appropriate.

This appeal followed. ¹

II

In enacting the Bankruptcy Code, Congress entrusted the power to approve the appointment of professionals to work on behalf of a bankruptcy estate to the discretion of the bankruptcy courts. As stated in 11 U.S.C. § 327(a):

Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional 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.

Although the Code vests in the bankruptcy trustee the immediate power to select candidates for employment by the bankruptcy estate, it gives broad discretion to the bankruptcy court over the appointment of professionals to work on behalf of the trustee and the estate, in part by empowering the court to approve candidates so selected. See In re Martin, 817 F.2d 175, 182 (1st Cir.1987) ("Historically, bankruptcy courts have been accorded wide discretion ... in regard to the terms and conditions of the engagement of professionals.").

Even so, that discretion is carefully circumscribed. Under the terms of § 327(a), the bankruptcy court may only approve the appointment of a "disinterested person," cf. 11 U.S.C. § 101(14) (defining "disinterested"), and may not approve the appointment of a professional who holds or represents "an interest adverse to the estate." Additionally, the bankruptcy court cannot approve a trustee's appointment of "a person that has served as an examiner in the case," § 327(f), and may only approve the employment of a professional who has represented a creditor of the estate if that person no longer represents the creditor in connection with the bankruptcy case, § 327(c). These are congressionally established per se rules that a bankruptcy court must apply in exercising its approval power over the appointment of professionals. See Childress v. Middleton Arms Ltd. Partnership (In re Middleton Arms), 934 F.2d 723, 725-26 (6th Cir.1991). Neither party to the present appeal, however, suggests that these rules require the disqualification of Jernigan to serve as the estate's counsel and accountant.

Because the few absolute disqualifications Congress has established are carefully delineated and narrowly tailored, ² the courts must take care not to fashion absolute prohibitions beyond those legislatively mandated without some measure of assurance that the purposes of the Bankruptcy Code always will be served thereby. Just as the bankruptcy court cannot use its equitable powers to ignore legal requirements set out by Congress in the Bankruptcy Code, see IRS v. Levy (In re Landbank Equity Corp.), 973 F.2d 265, 271 (4th Cir.1992), it is our opinion that the court similarly must not abdicate the equitable discretion granted to it by establishing rules of broad application which fail to take into account the facts of a particular case and the overall objectives of the bankruptcy system. See In re Martin, 817 F.2d at 182; see also In re BH & P, Inc., 949 F.2d 1300, 1315 (3d Cir.1991) ("[C]ourts have generally declined to formulate bright-line rules concerning the criteria for disqualification but have...