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The issues before the Court were whether an attorney representing the debtor who accepts a position with a creditors' firm during the pendency of the bankruptcy case creates a connection that must be disclosed; whether total or partial denial of compensation is warranted for the non-disclosure; and whether the settlement agreement reached in this case during the time of the alleged conflict was fair and equitable and in the best interests of the estate. To resolve these issues, the bankruptcy court first examined the employment standards of 11 U.S.C. § 327(a). In furtherance of the disinterestedness prong of § 327(a) and the fiduciary duties counsel for the debtor owes the estate, FED. R. BANKR. P. 2014(a) requires counsel for debtors to disclose any connections that have the potential of creating a conflict of interest. These disclosure requirements under Rule 2014(a) continue after the initial application to employ is approved. The bankruptcy court agreed with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the court when such a connection arises during the representation of a debtor-in-possession. The required supplemental disclosure allows the court, not counsel, to determine whether a conflict exists and counsel remains disinterested under § 327(a). Failing to make a supplemental disclosure robs the court the power to make such a determination.

In this case, the court determined the attorney's acceptance of a position with creditors' counsel in the midst of settlement negotiations involving the same creditors should have been disclosed and counsel failed to do so. The Court held counsel for a debtor-in-possession has an ongoing fiduciary duty to supplement initial employment disclosures with any connections that arise that create potential conflicts. After determining there was a violation of Rule 2014(a), the court turned to the available remedies for such a non-disclosure. In the Tenth Circuit, the failure to supplement initial disclosures when a connection with the potential to create a conflict arises warrants total denial and/or disgorgement of compensation. However, the bankruptcy court has the discretion to determine whether total or partial denial of fees is appropriate based on the facts of a case. Here, the court determined only partial denial of fees from the date the connection (when the associate accepted a position with the creditor's firm) arose was proper. Finally, with respect to the settlement agreement, the bankruptcy court found the agreement was not tainted. Based largely on the evidence from the other creditors, the court determined the settlement agreement resulted in a fair and equitable allocation of the remaining assets, and debtors had no real stake in the outcome. Thus, the court concluded the settlement agreement was in the best interests of the estates under the Rule 9019 standard, with one amendment. The court reduced the administrative claim for debtors' counsel under the settlement agreement consistent with the denial of part of the firm's fees.

This case identifies (a) the characteristics of a non-statutory insider subject to a trustee's avoidance of preferential transfers and (b) the perils of transferring titles among relatives and closely held corporations pre-petition in an effort to remove personal property from the debtor's estate. It also illustrates the problems inherent in choreographing pre-petition debt collection and repossessing collateral from family members and their closely held corporations.
 
The plaintiff/trustee sought to avoid as preferences various pre-petition transfers of purported loan collateral/personal property by the debtor to the creditor. Unfortunately, it was in the context of the debtor/son and creditor/father in a tangled transaction which involved their respective closely held companies and repossession of the intended collateral by the creditor which secured the obligation. The lender did take a judgment against the debtor after default on the loan and moved to enforce the judgment.
 
The court held that the lender, the father's closely held corporation, received avoidable preferential transfers from his son and his son's closely held corporation, when recovering the collateral that secured the son's obligation. The lender was deemed a non-statutory insider due to (a) the father's close and controlling relationship with the lender company and with his son, individually, (b) the staging of the "repossession" by the father and the father's attorney, and (c) the bogus transfer of debtor's assets to the lender, but debtor's continuing retention and possession of the collateral. 
 
The court also found the personal use, and casual and indiscriminate transfers and titling of the loan collateral (motor vehicles), was evidence of the debtor's rights and interests in his businesses' property, thus relegating that business property to be property of his, the debtor's estate. 

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