Texas Bankruptcy Court Enforces Standards for Retention of Counsel

The Bankruptcy Code contains elaborate rules for the employment of counsel, accountants, consultants, financial advisors and other outside professionals in all bankruptcy cases.  These rules generally require bankruptcy court approval of all professional engagements.  Section 327 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2014, as modified by Court opinions, contain the primary standards that bankruptcy courts use to approve professional engagements.

The goal of these rules is to obtain professionals who (a) are not adverse to the bankruptcy estate, (b) will provide value to the estate and (c) will not encumber the estate with unnecessary expense.  Needless to say, the court opinions discussing the goals of these provisions of the Bankruptcy Code are, practically speaking, as important as the text of the statute itself.

Case in point; in a recent memorandum opinion entered in the case of In re Stephan Bechuck, Case No. 11-39537 (S.D.T.X. April 4, 2012), the Bankruptcy Court for the Southern District of Texas denied a chapter 7 trustee’s application to retain counsel on several grounds.  The reasoning of this Opinion is likely to impose higher pleading standards in future retention applications for professionals in the Southern District of Texas and possibly in other Federal Districts in Texas.

The Bechuck Court started by explaining that, in addition to the disinterestness requirements under section 327 of the Bankruptcy Code, Federal Rule of Bankruptcy Procedure 2014(a) requires a retention application for a professional to include the following information:

  • The specific facts demonstrating the necessity for employing the attorney;
  • The name of the attorney;
  • The reasons for selecting the attorney;
  • The professional services the attorney will provide;
  • Any proposed fee arrangement; and
  • All connections with the debtor, creditors, US Trustee and any other party in interest.

The Bechuck Court ultimately concluded that the instant application to employ a law firm to represent the chapter 7 trustee lacked sufficient detail regarding the proposed counsel’s qualifications, as required by Bankruptcy Rule 2014.  The Court cited to several examples of deficiencies.

First, according to the Court, the retention application failed to disclose the history of success that the law firm (applicant) had achieved in representing the trustee in past engagements. The Court found that the mere statement that the applicant had previously represented the trustee in “numerous” chapter 7 and chapter 11 proceedings, alone, was insufficient to prove the history of success.

Second, the Court reasoned that the application failed to describe how the applicant had experience in the specific assignments for which it was being retained. The Court conceded that the application did describe the scope of proposed assignments, but the Court was not satisfied with this level of detail. For instance, the Court noted that the application represented that the applicant was being engaged to “analyze, institute and prosecute actions regarding insider transactions and third party dealings,” but failed to describe the applicant’s history in bringing similar claims in the past.

The Court also noted that the applicant’s representation that the trustee had professional business relationships with the applicant in the past was irrelevant to the merits of the application.  The Court further noted that the applicant’s signature on the application on behalf of the trustee, instead of the trustee’s actual signature, suggested that the trustee was not giving sufficient consideration to the merits of submitting the application and instead was relying on form pleadings of the applicant.

The Court concluded by saying that its opinion “will be unsettling to Chapter 7 trustees and some attorneys who have been representing these trustees over the past several years.”  According to the Court, the “culture of Chapter 7 trustee representation has involved repeated retention of the same attorneys who have become accustomed to being retained out of friendship and reciprocal retention.”

While the Court mentioned high hopes for improving the details of retention applications in chapter 7 cases, the Court’s opinion should not be confined to chapter 7 cases, as section 327 of the Bankruptcy Code and Bankruptcy Rule 2014 (both discussed in the Court’s opinion) equally apply to chapter 11 bankruptcies.  Accordingly, it appears that it would be prudent for future professional applicants in this Texas forum to provide more details about their qualifications–if not more–in future retention applications.