On Sept. 29, 2016, the Ninth Circuit Court of Appeals affirmed the district court’s decision upholding the bankruptcy court’s denial of a post-discharge motion for attorneys’ fees. The underlying motion stemmed from pre-petition state court litigation brought by creditor against debtor. While the ruling was against the creditor, debtors should be keenly aware of the applicable law, as the Ninth Circuit’s detailed opinion makes it clear that the “fair contemplation” test can cut both ways.

Most practitioners are aware of the risks that petitioning creditors face when filing an involuntary petition against an alleged debtor. If the court determines that the filing was improper or done in bad faith, penalties can be assessed against the petitioning creditors under 11 U.S.C. § 303(i), which can include requiring petitioning creditors to pay legal fees and costs as well as compensatory and punitive damages to the alleged debtor.

The Rosenberg case presents a new layer of potential liability for petitioning creditors. The Third Circuit Court of Appeals’ decision has opened the door for nondebtors to pursue claims for damages under nonbankruptcy law and outside of the bankruptcy court against petitioning creditors who have allegedly harmed such nondebtors through filing an involuntary petition. The nondebtors in Rosenberg asserted claims of tortuous interference against the petitioning creditors in federal district court under the court’s diversity jurisdiction. The district court dismissed the nondebtors’ complaint on the basis that the claims were preempted by the Bankruptcy Code. Thus, the question before the Third Circuit was whether the Bankruptcy Code, and in particular § 303(i), preempted such nondebtor claims. The Third Circuit found that it did not and reversed the district court decision.

Debtor’s counsel must be a “disinterested person” pursuant to § 327(a) of the Bankruptcy Code for a court to approve its retention or to award debtor’s counsel compensation for its services. As defined in the Bankruptcy Code, a disinterested person means, among other things, a person who is not a creditor of the debtor on the petition date. This can be problematic for counsel who finds themselves in the undesirable position of having to file a bankruptcy petition before a client has paid for all pre-petition services. In such a scenario, debtor’s counsel often waives any recovery on pre-petition claims, which would likely be classified as general unsecured claims, for fear of losing their disinterested status.

Recently, in In re Dynamic Drywall, the U.S. Bankruptcy Court for the District of Kansas denied an attorney’s application for quantum meruit hourly compensation, stating that when an agreement for employment based on a contingency fee is approved by the court, that agreement can only be altered in very unusual circumstances. An attorney who was employed to work on two separate matters for the same client filed an application to receive quantum meruit hourly compensation for work done on one of the matters. The attorney, who had a contingency agreement approved by the court, claimed he was terminated and thus thwarted from securing a recovery for his client that he would have shared. The court found that the client had not terminated the attorney and that under 11 U.S.C. § 328, because the attorney’s employment was approved as a contingency fee arrangement, the engagement could not be changed to a quantum meruit hourly fee arrangement.

The Ethics & Professional Compensation Committe will team with the Technology & Intellectual Property Committee to present the session titled "Ethical Issues Regarding the Use of Media in High Profile Cases." Navigating the use and impact of the media in any bankruptcy case can pose challenging ethical dilemmas that are only exacerbated in high-profile cases. The panelists will explore these issues and share some of their personal insights and stories.

Elizabeth J. Austin
Pullman & Comley, LLC; Bridgeport, Conn.

Gregg M. Galardi
Ropes & Gray LLP; New York

Nellwyn Voorhies-Kantak
Donlin, Recano & Company, Inc.; del Mar, Calif.

Hon. Mary F. Walrath
U.S. Bankruptcy Court, District of Delaware; Wilmington

This year's conference will be held at the Marriott Marquis in Washington, D.C., on April 20 - 23. Don't miss out on this intense networking and educational opportunity!