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No Conflict from Consultant’s ‘Connections’

A financial consultant for a creditor of the debtor limousine company is entitled to his reasonable fee of $1,000 per week for his services, and the Alexandria U.S. Bankruptcy Court rejects the Chapter 7 Trustee’s contentions that the consultant’s disclosures in his application for employment were inadequate under Bankruptcy Rule 2014(a).

The Trustee argues that the consultant’s “connections” with the creditor, who was debtor’s primary secured lender, were not adequately disclosed, and that he had an impermissible conflict of interest, in that he had reporting duties to the creditor.

Under Rule 2014(a), professionals to be employed by the estate must disclose “to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants,” the U.S. Trustee, or any person employed in the U.S. Trustee’s office. The Rule does not define the term “connections.” The term has been the subject of some discussion in the recent case law. In In re Fibermark Inc., (Bankr. D. Vt. 2006), the court noted it is quite typical for a bankruptcy professional who works primarily in chapter 11 cases to have dealt with other bankruptcy professionals in any particular case, on many previous occasions.

In this case, the creditor recommended that debtor hire the consultant, but it did not direct his employment to the exclusion of any other financial advisor. The consultant had worked with the creditor and debtor’s law firm in one prior case. The fact that he was recommended by the creditor the engagement in this case, in the court’s view, is simply not a “connection” within the meaning of Rule 2014(a). Similarly, the fact that the consultant worked with debtor’s law firm in a previous case is not a connection that is required to be disclosed. At the time of his Rule 2014 Statement, the consultant had no financial transactions ongoing with the creditor or with the law firm. He simply knew them from a prior case. He was not simultaneously engaged in any other bankruptcy cases in which the creditor was a party, or in which the law firm was counsel. The court finds that the consultant’s connections with the creditor and with the law firm are not of the kind that needed to be disclosed in his application for employment.

Nor was there a conflict of interest in the fact that the consultant’s service agreement contains certain reporting requirements to the creditor. These kinds of reporting requirements are not unusual and do not constitute an impermissible conflict of interest. Secured lenders, for their part, often may require these kinds of reporting provisions in order to effectively monitor their collateral. As long as the financial professional retains objectivity and understands that his fiduciary duties remain with the bankruptcy estate and not to the secured lender, these kinds of reporting requirements are not impermissible. Here, the court is satisfied that the consultant recognized that his fiduciary duties ran to the bankruptcy estate and not to the creditor. The court will not deny or diminish the consultant’s compensation on the basis of a conflict of interest with the creditor.

The court can only conclude the consultant’s weekly rate of $1,000 was a bargain for the estate. The requested compensation is reasonable.

The Trustee argues the fee should not be allowed, or should be disgorged to the extent the consultant has been paid, because of the likelihood of an administrative insolvency for the chapter 11 professionals. The court will allow the requested compensation, subject to any later disgorgement motion the Chapter 7 Trustee may wish to pursue. The Trustee need not pay any unfunded portion of the allowed fees at this stage of the case.

In re: Blue Ridge Limousine and Tour Service Inc. (Kenney) No. 12-17551, Aug. 20, 2014; USBC at Alexandria, Va.; Justin Fasano for debtors; John O’Donnell for consultant; Bradley D. Jones, U.S. Trustee Office. VLW 014-4-008, 17 pp.

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