What is a Section 327 Appointment?
According to Section 327(a) of the Bankruptcy Code, a Section 327 appointment involves an attorney appointed by a bankruptcy trustee to assist in a Chapter 7, 11 and 13 bankruptcy proceeding. Special counsel appointed in this capacity must first sign a sworn affidavit that they do not represent any materially adverse interest to the estate and is not an interested party. Special Counsel in a Section 327 appointment is also prohibited from assisting the trustee in carrying out the trustee’s duties under Section 327.
Bankruptcy Courts have interpreted Section 327 in a variety of ways. For example, a court in North Carolina initially approved a debtor’s application to hire an attorney for their bankruptcy proceedings (See In re: Kimberly Nifong Mitchell, Case No.11-08880-8-ATS (Bankr. E.D. No. Car. 2013) [Doc. No. 294]). However, they later disqualified the attorney because the financial schedule of the debtor showed that, prior to their bankruptcy petition requesting the approval to retain the attorney for the proceeding, they conveyed property to a certain limited liability company (LLC). However, the same attorney also represented the owner of the LLC to which the property was sold and they had a close business relationship. The attorney was then disqualified and prohibited from collecting any attorney’s fees. In defense, the attorney argued that they prepared an affidavit disclosing the relationship prior to the debtor’s court application, but it was not filed due to an administrative error. The court ruled that this was irrelevant and upheld the sanctions.
The firm later attempted to file another application and retrieve its administrative expenses. Although prior case law did imply that the court had discretion in allowing the firm to recoup its expenses, the court ruled that because the initial application would have been denied had the affidavit been properly submitted, the attorney may not receive fees.
Because an attorney is held to a higher standard when it comes to knowledge of regulations and the law, the court determined that the lawyer should have known the court would reject the application because of the conflict.
What are the Consequences for violating Section 327?
Generally, an attorney is free to accept a Section 327 appointment by a bankruptcy trustee if they do not hold an interest adverse to the estate. The professional code of ethics in every state requires an attorney to exercise loyalty and to carry out the client’s wishes as long as they conform to ethical standards. However, in bankruptcy proceedings the duties required of an attorney are more stringent. Not only must the attorney not hold an interest adverse to the bankruptcy estate, but they must also be a disinterested person. Violations of the code will result in sanctions and other negative consequences, regardless of whether or not it was an intentional concealment or accidental omission. Such sanctions may include:
- • Disqualification and replacement;
- • Denial of compensation for already-rendered services; and
- • Negative impact on the firm’s reputation
Audet & Partners, LLP has expanded its practice to include special counsel services to assist trustees in Chapter 7, 11 and 13 bankruptcies. This is especially important given the heightened scrutiny of the court on trustee appointments under Section 327, as well as the dire consequences for even unintentionally violating the code. Please contact us, either by completing the online inquiry form on the right side of this page, or by calling (800) 965-1461.