Rome v. Braunstein

• Decision Date: 04 January 1994
• Docket Number: No. 93-1971,93-1971
• Citation: 19 F.3d 54
• Parties: , 25 Bankr.Ct.Dec. 695, Bankr. L. Rep. P 75,773 Bernard P. ROME, Appellant, v. Joseph BRAUNSTEIN, etc., Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 54

19 F.3d 54

62 USLW 2638, 25 Bankr.Ct.Dec. 695, Bankr.

L. Rep. P 75,773

Bernard P. ROME, Appellant, v. Joseph BRAUNSTEIN, etc., Appellee.

No. 93-1971.

United States Court of Appeals, First Circuit.

Heard Jan. 4, 1994.

Decided March 22, 1994.

Bernard P. Rome, with whom Rome, George & Klein, Boston, MA, was on brief for appellant.

Isaac H. Peres, with whom Riemer & Braunstein, Boston, MA, was on brief for appellee.

Before SELYA, Circuit Judge, BOWNES, Senior Circuit Judge, and CYR, Circuit Judge.

CYR, Circuit Judge.

Bernard P. Rome, Esquire, appeals from a district court order entered on intermediate appeal, affirming a bankruptcy court ruling under Bankruptcy Code Sec. 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 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 Sec. 1107(a), 11 U.S.C. Sec. 1107(a); see also id. Sec. 327(a), 11 U.S.C. Sec. 327(a). Thereafter, as counsel to the debtor in possession, Rome filed three abortive chapter 11 reorganization plans proposing a 20% dividend to general creditors. Various CHM creditors successfully resisted 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.

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 retention of Riemer and Braunstein (R & B) as counsel to the chapter 11 trustee.

Late in 1991, Braunstein, R & B, and Rome filed applications 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 trustee, opposed the Rome application.

At the hearing held on these fee applications, Braunstein 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 "produced 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 158 B.R. 547.

II DISCUSSION

The Bankruptcy Code imposes particularly rigorous conflict-of-interest restraints upon the employment of professional 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, 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.

Bankruptcy Code Sec. 327(a), 11 U.S.C. Sec. 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 Sec. 1107(a), 11 U.S.C. Sec. 1107(a) (Sec. 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 conflicts 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 Sec. 328(c), 11 U.S.C. Sec. 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) U.S.Code Cong. & Admin.News 1978, pp. 5787, 5825.

Although the Code idiom "interest adverse" is not defined, ¹ the companion requirement--that appointees be "disinterested"--is defined, see Bankruptcy Code Sec. 101(14), 11 U.S.C. Sec. 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 creditors 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 assistance in furtherance of their fiduciary responsibilities. ²

In the exercise of its own ongoing affirmative responsibility to "root out impermissible conflicts of interest" under Bankruptcy Code Secs. 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 disqualification and the denial or disgorgement of all fees. Id. at 182-83. See Bankruptcy Code Sec. 328(c), 11 U.S.C. Sec. 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 LaRoche, 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 from the chapter 11 estate. Rome raises three principal challenges to the bankruptcy court ruling.

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, however, 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...