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Meaningful Disclosure Under Rule 2014

posted by Lois R. Lupica & Nancy Rapoport

One of the frustrations experienced by all business bankruptcy attorneys seeking engagement in chapter 11 cases can be traced to the vague language of Rule 2014. The rule requires the disclosure of information necessary to determine whether the professional’s employment is in the best interest of the estate.

But what specific information should be disclosed and in what detail?  Currently, Rule 2014 does not limit the extent of disclosure of a professional’s connections with: (i) the debtor; (ii) any creditors of the debtor; (iii) other parties in interest; (iv) attorneys of the debtor, creditors, and parties in interest; (v) accountants for the debtor, creditors, and parties in interest; and (vi) the United States Trustee and persons employed by the U.S. Trustee’s office. The broad but undefined term “connection” has further led to confusion over the appropriate level of inclusiveness in disclosures. The uncertainty surrounding the meaning of “connection” has also led to attempts by professionals to argue that some important “connections are immaterial.” In other cases, professionals present a “phone book” sized disclosure documents, in which the meaningful connections are all but lost in the static. In deciding which connections are relevant, getting the judgment call wrong can be catastrophic for a lawyer; the failure to appropriately disclose connections is an independent basis for the disallowance of fees or even disqualification.

This context set the stage for the Ethics Task Force’s drafting of Proposed Rule 2014 (included in the Final Report). The Proposed Rule is an effort to provide clarity to professionals concerning what relevant connections must be disclosed, as well as to provide improved information for courts and other parties to use in determining a professional’s eligibility for employment.

In addition to describing the specifics of the information a professional should disclose, the Proposed Rule creates a category of “Relevant Connections” and elaborates on the types of connections that are likely actually to be relevant to a court’s determination of whether it should approve the professional’s employment. The Proposed Rule’s definition of “Relevant Connection” reads:

For purposes of this Rule, and unless otherwise defined by the court, “Relevant Connection” means,

(1) any connection with a person or entity listed in subsection (b) that:

(A) on or within two years of the filing of the petition, generated a material amount of income and/or transfers;

(B) involved or was related to property of the estate with a material value;

(C) involved a material business venture with the person or entity; or

(D) involved working for the person or entity as a professional and generating a material amount of  fees in the two years prior to the filing of the petition;

(2) any connection with the court to which the employment application is being submitted;

(3) any connection with the United States Trustee or any person employed in the office of the United States Trustee; or

(4) any other connection constituting a personal, professional, or business relationship that could reasonably be determined to be significant in its evaluation of whether a professional is qualified to be employed.

With respect to each Relevant Connection, the applicant shall disclose personal and professional relationships and other connections relevant to determining the existence of bias or influence on professional judgment. Any materiality threshold used by the applicant for each Relevant Connection shall be set forth in the application. If the court directs use of a different threshold, the professional shall amend its disclosures to conform to such threshold. The list of Relevant Connections is intended to be comprehensive and encompass connections relevant to the court’s consideration of the application. Any additional relevant connections necessary to prevent the application and the professional’s verified statement from being materially misleading shall be included. 

Accompanying the proposed amendment is a “connections grid” that is designed to highlight for the court the types of connections that are disclosed and cross-referencing the relevant paragraphs in the Rule 2014 disclosure. The grid should help a court “cut to the chase” as it sorts through the various relevant connections.

In March, the Task Force submitted Proposed Rule 2014 to the Advisory Committee on Bankruptcy Rules where it is currently under consideration.  Comments and reactions are most welcome.

Comments

By using the word "professional", this is ambiguous about personal connections vs firm connections when the "professional" is a firm.

Some troublesome incidents have involved personal interests of the lead attorney for a debtor although it was the firm itself that was retained. Cases like Geneva Steel (lead individual attorney secretly joined other parties in interest in real estate deal affecting bankruptcy estate) and GSC (lead individual attorney personally provided legal services outside of firm purview to turnaround professional related to fee-splitting arrangement that was not disclosed) are examples.

The law needs to be clear as to when individual attorneys count as the "professional". For example, in a firm of 1000 attorneys, do you have to find out what securities any one of them has of the debtor or of other parties in interest? Do you need to pick up legal work any one of them did for parties in interest while at prior firms? And so on.

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