Case: 11-30462 Document: 00511805140 Page: 1 Date Filed: 03/29/2012
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
March 29, 2012
No. 11-30462 Lyle W. Cayce
Clerk
In the Matter of: AMERICAN INTERNATIONAL REFINERY,
INCORPORATED; AMERICAN INTERNATIONAL PETROLEUM
CORPORATION,
Debtors
---------------------------------------------------------------------------------------------
ROBBYE R. WALDRON,
Appellant
v.
ADAMS & REESE, L.L.P.,
Appellee
Appeal from the United States District Court
for the Western District of Louisiana
Before BENAVIDES, STEWART, and GRAVES, Circuit Judges.
BENAVIDES, Circuit Judge:
This case is an adversary proceeding arising out of the Chapter 11
bankruptcy of American International Petroleum Company (“AIPC”) and
American International Refinery, Inc. (“AIRI”) (collectively the “debtors”).
Appellant Robbye R. Waldron, the Liquidating Trustee of the AIPC Liquidating
Trust (the “Trustee”), filed suit against Appellee Adams & Reese, LLP (“A&R”),
Case: 11-30462 Document: 00511805140 Page: 2 Date Filed: 03/29/2012
No. 11-30462
the former debtors’ counsel, seeking disgorgement of the attorney’s fees awarded
during the bankruptcy. After a bench trial, the bankruptcy court ordered a
sanction of $135,000 for A&R’s failure to adequately disclose various connections
it had to the debtors and creditors, but it found that A&R did not have a
disqualifying adverse interest. The Trustee appeals, arguing that A&R was not
disinterested and that all legal fees should have been disgorged. We AFFIRM.
I. FACTUAL AND PROCEDURAL BACKGROUND
At the time of its bankruptcy, AIPC was a public corporation, with various
affiliates and subsidiaries, including: AIRI, wholly owned by AIPC; St. Mark’s
Refinery, wholly-owned by AIPC; American International Petroleum Kazakhstan
(“AIPK”), also wholly-owned; and Caspian Gas Corporation (“CGC”), partially
owned. AIPC refined, produced, and marketed oil and engaged in oil and gas
exploration in Kazakhstan. Through AIPK and CGC, one of AIPC’s principal
assets was a gas concession in the Shagyrly-Shomyshty gas field, located in
Kazakhstan, called License 1551. At the time of its bankruptcy, the debtors’
largest creditors were GCA Strategic Investment Fund Limited (“GCA”) and
Halifax Fund, L.P. (“Halifax”).
In January 2004, in a transaction that forms a basis for part of the
Appellant’s claims against A&R, AIPK sold eighty-five percent of its interest in
License 1551 to Bridge Hydrocarbons, LLC (“Bridge”), for approximately $5
million. A substantial portion of this sum was used to pay back-wages and
benefits to AIPC’s officers.1 In connection with the Bridge transaction, GCA
executed a consent agreement with AIPC, in which it agreed to release a security
interest it held in AIPK’s shares. On December 11, 2003, however, GCA sent a
1
A&R acted as a neutral escrow agent for the Bridge transaction, although it did not
represent either party and was eventually replaced by another law firm. Soon after
completion of the Bridge transaction, A&R provided legal advice to AIPC on the accounting
treatment of the payments AIPC had made to its officers.
2
Case: 11-30462 Document: 00511805140 Page: 3 Date Filed: 03/29/2012
No. 11-30462
letter to AIPC indicating that its release was subject to certain conditions. Even
though these conditions never occurred, the Bridge transaction was still
completed, and it is not clear if GCA effectively retained a security interest in
AIPK’s shares. In exchange for releasing its security interest, GCA was
supposed to have received substitute collateral from AIPC in the form of an
assignment of dividends payable from CGC to AIPK. The assignment was not
executed prior to the closing of the Bridge transaction. During pre-bankruptcy
petition negotiations between GCA and the debtors, A&R drafted the dividend
assignment agreement (the “Dividend Assignment”) between AIPC and GCA.
Although the Dividend Assignment was not executed until after the filing of the
debtors’ bankruptcy petition, it was backdated to the date of the Bridge
transaction. A&R never disclosed its role in drafting the Dividend Assignment
to the bankruptcy court.
AIPC engaged A&R to assist in its restructuring in early 2004.2 In this
role, A&R represented AIPC during the negotiations of an agreement with GCA
(the “lock-up agreement.”). The lock-up agreement provided that GCA would
vote in favor of the bankruptcy plan that the debtors intended to propose, so long
as GCA’s claims were treated as set forth in the agreement. The lock-up
agreement was never fully executed and the final bankruptcy plan was not based
on the lock-up agreement’s terms.
In fall 2004, AIRI and AIPC filed for bankruptcy in the Western District
of Louisiana in the same proceeding. The debtors continued to retain A&R as
bankruptcy counsel, an appointment that was approved by the bankruptcy court.
One of the transactions that the Trustee also claims created a disqualifying
conflict involves AIPC’s payment of its bankruptcy retainer. Because AIPC did
not have adequate cash to pay a retainer, AIPC management sought out a
2
Prior to its bankruptcy, AIPC had been A&R’s client on a variety of matters.
3
Case: 11-30462 Document: 00511805140 Page: 4 Date Filed: 03/29/2012
No. 11-30462
different source of funding. An arrangement was reached, with A&R’s
knowledge, whereby GCA loaned St. Mark’s Refinery—a wholly-owned
subsidiary of AIPC—$200,000 in exchange for a security interest in the sale of
some real estate. As part of the transaction, GCA wired the retainer funds
directly to A&R, with a notation indicating they were paid on behalf of the
debtors. A&R’s retention application to the bankruptcy court did not disclose the
source of its retainer.
The bankruptcy action involved conflict over the treatment of GCA’s
secured claims. The Equity Security Holders Committee (the “Equity
Committee”) objected to the various bankruptcy plans filed by the debtors,
largely on the ground that the plans treated GCA’s claims too favorably.
Ultimately, in March 2006, the Equity Committee and GCA reached a
settlement. The settlement was confirmed by the bankruptcy court and it
provided for full payment of all secured and unsecured claims and a distribution
to equity holders.3 A&R was awarded $678,936.25 in fees and $63,100.67 in
costs. A&R did not, however, disclose GCA’s payment of the initial retention fee
to the court in its three separate applications for compensation.
The current adversary proceeding was filed in September 2006 by the
Trustee.4 In December 2006, after A&R disclosed that GCA paid its initial
retainer fee, the Trustee filed an amended complaint adding claims for
disgorgement and punitive damages for willful misconduct.5 The bankruptcy
court granted a motion for partial summary judgment, and it dismissed the
3
AIPC and A&R had no involvement in the negotiation or terms of the final settlement.
4
At the time of the filing of the current adversary proceeding, the Trustee was Jason
Searcy. Searcy was later replaced by Robbye Waldron, the current liquidating Trustee. We
simply refer to both individuals as the Trustee and do not distinguish between them unless
it is relevant to the analysis.
5
The complaint originally asserted claims for fraudulent and preferential transfer
claims under 11 U.S.C. §§ 547, 548, and 550 against A&R, seeking avoidance and damages.
4
Case: 11-30462 Document: 00511805140 Page: 5 Date Filed: 03/29/2012
No. 11-30462
Trustee’s claims for willful misconduct. The Trustee later filed a second
amended complaint, limiting the action to one for disgorgement. Subsequently,
the Trustee filed a motion for leave to file a third amended complaint, seeking
to add claims for fraud, fraudulent inducement, conspiracy, and breach of duty
against A&R. The claims centered on A&R’s decision not to dispute GCA’s
secured claims. The bankruptcy court denied in part and granted in part the
motion, allowing the breach of duty claim, but not the fraud-based claims. The
bankruptcy court later granted a motion for partial summary judgment,
dismissing the breach of duty claim. Thus, only the disgorgement claim
remained pending for trial.
The bankruptcy court held a three-day bench trial and issued a
memorandum ruling and judgment, finding: (1) that A&R did not have a
disqualifying adverse interest; (2) that A&R, nonetheless, failed to make
adequate disclosures of its connections to the debtors and to GCA; and (3) that
a disgorgement of $135,000 was a proper sanction for the disclosure violations.
The bankruptcy court denied all other relief.6 On appeal to this Court, the
Trustee argues that the bankruptcy court’s decision should be reversed because
A&R was not disinterested, that all fees must therefore be disgorged, and that
the bankruptcy court also abused its discretion by denying the motion to file a
third amended complaint.
II. STANDARD OF REVIEW
“This court reviews the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court.” In re
Scopac, 624 F.3d 274, 279–80 (5th Cir. 2010) (citing In re Morrison, 555 F.3d
473, 480 (5th Cir. 2009)). The factual findings of the bankruptcy court are
6
On appeal, the district court upheld the bankruptcy court’s decision in its entirety.
5
Case: 11-30462 Document: 00511805140 Page: 6 Date Filed: 03/29/2012
No. 11-30462
reviewed for clear error and its conclusions of law are reviewed de novo. Id.
“[The court’s] finding of fact may be reversed only if the reviewing court has the
definite and firm conviction that a mistake has been made.” Id. (quotation
marks omitted). A bankruptcy court’s decision to disgorge fees or impose a
sanction is reviewed for abuse of discretion. In re West Delta Oil Co., 432 F.3d
347, 358 (5th Cir. 2005); In re Prudhomme, 43 F.3d 1000, 1003–04 (5th Cir.
1995). A denial of a motion for leave to amend is also reviewed for abuse of
discretion. Gentilello v. Rege, 627 F.3d 540, 546 (5th Cir. 2010).
III. ANALYSIS
A. Disqualifying Conflict of Interest
On appeal, the Trustee’s central argument is that the bankruptcy court
erred in finding that A&R did not have a disqualifying interest. Specifically, the
Trustee argues that A&R was not disinterested: (1) because GCA paid the
bankruptcy retainer; (2) because of A&R’s relationship with GCA; and (3)
because A&R advised AIPC on how to characterize payments made to officers
and directors several months prior to filing the bankruptcy petition.
The Bankruptcy Code requires that a professional retained by the debtor
in possession not “hold or represent an interest adverse to the estate,” and that
the professional be “disinterested.” 11 U.S.C. § 327(a); In re W.F. Dev. Corp., 905
F.2d 883, 884 (5th Cir. 1990). The term “disinterested” is defined in 11 U.S.C.
§ 101(14) as a person (1) who “is not a creditor, an equity security holder, or an
insider, ”(2) who “is not and was not, within 2 years before the date of the filing
of the petition, a director, officer, or employee of the debtor,” and (3) who “does
not have an interest materially adverse to the interest of the estate or of any
class of creditors or equity security holders, by reason of any direct or indirect
relationship to, connection with, or interest in, the debtor, or for any other
reason.” 11 U.S.C. § 101(14); W.F. Dev. Corp., 905 F.3d at 884. A party has an
“adverse interest” to the estate if they: “(1) [ ] possess or assert any economic
6
Case: 11-30462 Document: 00511805140 Page: 7 Date Filed: 03/29/2012
No. 11-30462
interest that would tend to lessen the value of the bankruptcy estate or that
would create either an actual or potential dispute in which the estate is a rival
claimant; or (2) [ ] possess a predisposition under circumstances that render such
a bias against the estate.” West Delta Oil, 432 F.3d at 356 (quotation marks
omitted); see also In re AroChem Corp., 176 F.3d 610, 623 (2d Cir. 1999) (same);
In re Crivello, 134 F.3d 831, 835 (7th Cir. 1998) (same).7 The determination of
an adverse interest must be made “with an eye to the specific facts of each case.”
West Delta Oil, 432 F.3d at 356. The standards for finding a conflict are “‘strict’”
and “attorneys engaged in the conduct of a bankruptcy case ‘should be free of the
slightest personal interest which might be reflected in their decisions concerning
matters of the debtor’s estate or which might impair the high degree of
impartiality and detached judgment expected of them during the course of
administration.’” West Delta Oil, 432 F.3d at 355 (quoting In re Consol.
Bancshares, Inc., 785 F.2d 1249, 1256 & n.6 (5th Cir. 1986)).
Under Section 328(c), “[a] court may deny compensation for services
provided by an attorney who holds such an adverse interest.” West Delta Oil,
432 F.3d at 354–55; 11 U.S.C. § 328(c). A bankruptcy court is not required,
however, to deny all compensation if an attorney has an adverse interest and is
found to not be disinterested. West Delta Oil, 432 F.3d at 355 n.22 (explaining
that the rule is flexible because a bankruptcy court is one of equity); In re Prince,
40 F.3d 356, 359–60 (11th Cir. 1994) (same); Gray v. English, 30 F.3d 1319, 1324
(10th Cir. 1994) (same).
As noted, the Trustee argues that A&R was not disinterested based on
three different grounds. Two of these grounds focus on A&R’s connections to
7
The “adverse interest” term in Section 327(a) is generally considered to have the same
meaning as the “adverse interest” term in Section 101(14). See, e.g., West Delta Oil, 432 F.3d
at 356 (stating the phrases as having the same meaning); In re WorldCom, Inc., 311 B.R. 151,
164 (Bankr. S.D.N.Y. 2004) (stating the two definitions form a “single test to judge conflicts”).
7
Case: 11-30462 Document: 00511805140 Page: 8 Date Filed: 03/29/2012
No. 11-30462
GCA and we will consider them together. The most troubling aspect of A&R’s
relationship to GCA is obviously GCA’s payment of the bankruptcy retainer.
Courts have taken two approaches when deciding if payment of a bankruptcy
retainer by a third-party is a disqualifying interest. Some courts have found
that payment of a retainer by a third party is a per se disqualification, while
other courts have held that the totality of the circumstances surrounding the
retainer payment must be scrutinized before deciding if a disqualifying conflict
exists. See In re Lotus Props. LP, 200 B.R. 388, 391–96 (Bankr. C.D. Cal. 1996)
(explaining both approaches).
Although we have not formally adopted a test in this Circuit, we find that
the per se approach is inconsistent with our decision in West Delta Oil. In that
decision, we stated that the existence of a conflict should be determined “with an
eye to the specific facts of each case.” West Delta Oil, 432 F.3d at 356; see also
In re Harold & Williams Dev. Co., 977 F.2d 906, 909–10 (4th Cir. 1992) (stating
that judicially created per se rules for disqualifications are usually not
appropriate).8 Thus, we now adopt the totality of the circumstances approach
for deciding whether third-party payment of a retainer creates a disqualifying
interest.9
8
See also In re Rabex Amuru of N.C., Inc., 198 B.R. 892, 895–96 (Bankr. M.D.N.C.
1996) (stating that per se rule regarding retainer payment conflicts with notion that an
adverse interest is supposed to be a case-specific determination).
9
See In re 7677 E. Berry Ave. Assocs., L.P., 419 B.R. 833, 844 (Bankr. D. Colo. 2009)
(adopting totality test and characterizing it as the majority approach); Lotus Props., 200 B.R.
at 392–95 (adopting totality approach); In re Mo. Mining, Inc., 186 B.R. 946, 948–50 (Bankr.
W.D. Mo. 1995) (same); In re Kelton, 109 B.R. 641, 644–58 (Bankr. D.Vt. 1989) (same). Some
of the cases applying the totality approach set forth specific multi-factor tests to be used when
judging if the retainer payment rises to the level of a disqualifying interest. See, e.g., Kelton,
109 B.R. at 658 (stating multi-factor test); Missouri Mining, 186 B.R. at 949 (same) (citing In
re Olson, 36 B.R. 74, 76 (D. Neb. 1983)). We decline to adopt a particular test, and instead,
more generally instruct, consistent with West Delta Oil, that all of the circumstances of the
representation must be considered.
8
Case: 11-30462 Document: 00511805140 Page: 9 Date Filed: 03/29/2012
No. 11-30462
The Trustee cites a number of actions taken by A&R that it argues shows
that A&R felt loyalty to GCA due to the retainer. We will analyze each of these
occurrences. First, the Trustee argues that A&R’s role in negotiating the pre-
petition lock-up agreement shows A&R’s loyalty to GCA. It is undisputed that
A&R acted as the debtors’ counsel during the pre-petition negotiations with
GCA. It is not clear, however, how A&R’s role in this negotiation evidences any
divided loyalties. It is common for a law firm to help its client negotiate a pre-
petition agreement with a creditor and the bankruptcy process encourages such
voluntary settlements.
The Trustee also argues that A&R believed that it was bound by the
retainer payment to favor GCA’s claims. Loyalty to a third-party due to the
payment of a retainer would obviously render a party not disinterested. See In
re Big Rivers Elec. Corp., 355 F.3d 415, 434 (6th Cir. 2004) (stating that a
professional would not be disinterested if payment by creditor was linked to
providing favorable result to that creditor). There is some evidence in the record
showing that A&R discussed submitting bankruptcy plans that were favorable
to GCA. However, the evidence supporting the Trustee’s contentions on this
point can also be interpreted as simply showing that A&R was aware that
confirmation of a plan would require GCA’s support, and that the proposed plan
must, therefore, be acceptable to GCA. The bankruptcy court found that the
record more fairly supported this legitimate inference. We are in a poor position
to second-guess that factual judgment, and we now hold that this factual finding
is not clear error. United States v. Casteneda, 951 F.2d 44, 47 (5th Cir. 1992)
(stating that where “two permissible views of the evidence are presented, the
district court’s choice between them cannot be clearly erroneous.”).
Third, the Trustee argues that A&R’s divided loyalties are evidenced by
its decision not to litigate GCA’s secured claim. GCA’s secured claim was based
on its lien on AIPK’s shares and on the assignment of CGC dividends from AIPK.
9
Case: 11-30462 Document: 00511805140 Page: 10 Date Filed: 03/29/2012
No. 11-30462
Although there are grounds for questioning A&R’s decision on this point, the
testimony at trial indicated that A&R considered whether to dispute these
claims and decided that the costs of litigation were not in the best interests of
the estate, particularly given that the debtors were already litigating Halifax’s
claims. In its analysis, the bankruptcy court considered the same arguments as
are currently presented on appeal, and it found that there was no evidence that
A&R’s decision was affected by loyalty to GCA. Again, this factual finding is
supported by evidence in the record and it is, therefore, not clearly erroneous.
See Fairley v. Hattiesburg, Miss., 584 F.3d 660, 673 (5th Cir. 2009) (“‘If the
district court’s account of the evidence is plausible in light of the record viewed
in its entirety, the court of appeals may not reverse . . .’” (quoting Anderson v.
City of Bessemer, 470 U.S. 564, 573 (1985)).
Finally, and most suspiciously, the Trustee offers evidence showing that
A&R drafted a motion for relief from stay on behalf of GCA during the
bankruptcy. The bankruptcy court found, however, that this letter did not
evidence any favoritism or loyalty to GCA. Instead, the bankruptcy court
credited testimony from Dean Ferguson, who was A&R’s lead attorney on the
bankruptcy, that A&R prepared the draft as part of a strategy to help overcome
a stalemate in negotiations between GCA and the Equity Committee. Even
though the circumstances surrounding the drafting of this motion are strange,
we again hold that the bankruptcy court’s factual findings on this issue are not
clearly erroneous. Ferguson’s explanation for the drafting is reasonable, and the
bankruptcy court did not err in crediting his testimony on this point. See
Fairley, 584 F.3d at 673. Thus, we find that this evidence does not show that
A&R’s loyalty to the debtors was compromised.
Overall, given the factual findings made below, we agree with the
bankruptcy court that GCA’s payment of the retainer did not create an adverse
interest or show that A&R was not disinterested. The facts of this case are not
10
Case: 11-30462 Document: 00511805140 Page: 11 Date Filed: 03/29/2012
No. 11-30462
nearly as egregious as those in West Delta Oil, where we found that special
counsel for the debtor had an adverse interest because they were actively
plotting to harm the estate for their own benefit. 432 F.3d at 357–58. In that
case, the attorneys for the debtor attempted to surreptitiously purchase the
debtor though an outside investor, while also suppressing other bids to
artificially depress the purchase price. Id. at 349–53. We held that
disgorgement of all fees was required due to the profound nature of the conflict.
Id. at 358. While some of the actions of A&R appear suspicious, this case does
not present a totality of the circumstances as egregious as West Delta Oil, and
we agree with the bankruptcy court that the relationship between GCA and
A&R does not rise to the level of a disqualifying conflict requiring the
disgorgement of fees. See AroChem, 176 F.3d at 628 (stating that a bankruptcy
court’s conclusions on a conflict of interest should be accorded deference); In re
Martin, 817 F.2d 175, 182 (1st Cir. 1987) (same). Here, unlike in that case, there
is no evidence that A&R took action contrary to the interests of the estate or
gave legal advice that was colored by loyalty to a third party. Accordingly, we
decline to reverse the bankruptcy court’s ruling on this issue.
In addition to A&R’s relationship to GCA, the Trustee separately argues
that A&R possessed a disqualifying interest because of its previous
representations of the debtors. Specifically, the Trustee argues that A&R’s role
in the Bridge transaction prevented it from offering objective legal advice to the
debtors. The bankruptcy court found that A&R did not have a conflict because
A&R’s role in these transactions was limited to a neutral escrow agent.
In January 2004, AIPK transferred eighty-five percent of its shares of CGC
to Bridge in exchange for $5 million. A significant portion of the sale price was
used to pay the wages and benefits of AIPC’s officers. The bankruptcy court’s
determination that A&R’s role was limited to a neutral escrow agent is incorrect
based on the testimony at trial. Rather, the testimony showed that A&R, in
11
Case: 11-30462 Document: 00511805140 Page: 12 Date Filed: 03/29/2012
No. 11-30462
addition to acting as an escrow agent, also advised AIPC on the accounting
treatment of these payments, and counseled AIPC that the payments should be
labeled “retention payments for future services.” Given this factual error, we
must now, therefore, determine whether A&R’s legal advice on these payments
created a disqualifying conflict.
Although under Section 1107(b) of the bankruptcy code, a professional “is
not disqualified for employment under section 327 of this title by a debtor in
possession solely because of such person’s employment by or representation of
the debtor before the commencement of the case,” 11 U.S.C. § 1107(b), courts
have held that the nature of the representation can still create a disqualifying
conflict under Section 327(a), such as where the attorney may be required to
review his own legal work in the course of the bankruptcy action. See, e.g., In
re Ressler Hardwoods & Flooring, Inc., 2010 WL 2342497, at *6–7 (Bankr. M.D.
Pa. June 8, 2010); In re Granite Sheet Metal Works, Inc., 159 B.R. 840, 841–49
(Bankr. S.D. Ill. 1993). We agree with these cases that earlier legal work can
require disqualification of counsel under certain circumstances. See West Delta
Oil, 432 F.3d at 355 (stating that an attorney should be free from the “slightest
personal interest which might be reflected in their decisions concerning matters
of the debtor’s estate or which might impair the high degree of impartiality and
detached judgment expected of them . . . .” (quotation marks omitted)).
Although recognizing such conflict is possible, we do not think that the
record supports finding one here. As noted by the Trustee, the wages and
benefits paid to AIPC’s officers and directors may have been avoidable because
they were paid close in time to the bankruptcy filing. Nonetheless, the Trustee
points to no evidence in the record indicating that A&R’s advice on the treatment
of these claims was clouded. Instead, the record shows that A&R counseled
against disputing these claims because, in its judgment, the potential benefit to
the estate was outweighed by the expense of litigating the claims. Although
12
Case: 11-30462 Document: 00511805140 Page: 13 Date Filed: 03/29/2012
No. 11-30462
obviously not ideal or best practice, A&R’s previous relationship to the debtors
is also insufficient to constitute a disqualifying interest.
B. Sanction for Failure to Make Adequate Disclosures
The Trustee also challenges the bankruptcy court’s ruling that $135,000
was an appropriate sanction for A&R’s violation of Bankruptcy Rule of
Procedure 2014(a). After finding that there was not a disqualifying conflict, the
bankruptcy court found that A&R had failed to make adequate disclosures under
Bankruptcy Rule 2014(a) of the source of its retainer and of its previous
relationship with the debtors. The bankruptcy court found, however, that none
of these disclosure errors were intentional and that no harm or prejudice to the
estate or creditors resulted. The court ordered a sanction of $135,000, or
approximately twenty percent of the total fees awarded to A&R.10 On appeal,
the Trustee argues that all compensation should have been disgorged.
“Federal Rule of Bankruptcy Procedure 2014(a) requires any professional
applying for employment to set forth ‘to the best of the applicant’s knowledge’ all
known connections of the applicant with the ‘debtor, creditors, or any other party
in interest, their respective attorneys and accountants, the United States
trustee, or any person employed in the office of the United States trustee.’” West
Delta Oil, 432 F.3d at 355 (quoting Fed. R. Bankr. P. 2014(a)). The disclosure
requirements of Rule 2014(a) are broader than the rules governing
disqualification, and an applicant must disclose all connections regardless of
whether they are sufficient to rise to the level of a disqualifying interest under
Section 327(a). See In re Cornerstone Prods., Inc., 416 B.R. 591, 608 (Bankr.
E.D. Tex. 2008) (stating that “all” connections must be disclosed); In re Leslie
Fay Cos., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1994) (same).
10
The district court also found no error in this ruling.
13
Case: 11-30462 Document: 00511805140 Page: 14 Date Filed: 03/29/2012
No. 11-30462
Courts may deny all compensation to professionals who fail to make
adequate disclosure, and “counsel who fail to disclose timely and completely
their connections proceed at their own risk because failure to disclose is
sufficient grounds to revoke an employment order and deny compensation.”
West Delta Oil, 432 F.3d at 355 (quotation marks omitted); see also Rome v.
Braunstein, 19 F.3d 54, 59–60 (1st Cir. 1994) (“Absent the spontaneous, timely
and complete disclosure required by section 327(a) and [Rule] 2014(a),
court-appointed counsel proceed at their own risk.”). In determining an
appropriate sanction, an important consideration is whether the failure was
intentional. Crivello, 134 F.3d at 839 (stating that “a bankruptcy court should
punish a willful failure to disclose the connections . . . as severely as an attempt
to put forth a fraud on the court.”). We review a bankruptcy court’s decision to
impose sanctions for abuse of discretion. West Delta Oil, 432 F.3d at 358.
The Trustee argues on appeal that the bankruptcy court erred in finding
that the disclosure errors were unintentional, arguing that the failure must have
been intentional because of the number of times that A&R failed to disclose its
relationships to the debtors and GCA. The Trustee is correct that A&R had
many opportunities to make full disclosure. Nonetheless, evidence in the record
shows that attorneys at A&R believed full disclosure had been made in their
employment application, and that the initial disclosure failure was the result of
negligence. The testimony at trial indicates the items that were disclosed were
compiled by an associate with little or no bankruptcy experience, that they were
then listed in the application without verification by Dean Ferguson, and that
the application was signed and filed by another attorney with no additional
review. Additionally, later email correspondence between Dean Ferguson and
another attorney also supports the conclusion that the disclosure errors were
inadvertent.
14
Case: 11-30462 Document: 00511805140 Page: 15 Date Filed: 03/29/2012
No. 11-30462
Given that the bankruptcy court’s factual findings are reasonable based
on the record, we conclude that bankruptcy court did not commit clear error. See
United States v. Trujillo, 502 F.3d 353, 356 (5th Cir. 2007) (factual findings are
not clear error if they are “plausible in light of the record as a whole”).
Accordingly, we hold that the bankruptcy court was acting well within its
discretion in ordering disgorgement of only a portion of the retainer. See West
Delta Oil, 432 F.3d at 355 n.22 (stating that review of sanctions is for abuse of
discretion); In re Cook, 223 B.R. 782, 794 (B.A.P. 10th Cir. 1998) (same).
C. Denial of Leave to Amend
Finally, the Trustee argues that the bankruptcy court abused its discretion
when it denied in part his motion for leave to file a third amended complaint.11
In the motion to file a third amended complaint, the Trustee sought to add much
broader claims for fraud, fraudulent inducement, conspiracy, and breach of duty.
The Trustee claimed that he discovered three new documents that were
previously unavailable. The bankruptcy court denied in part and granted in part
the motion, allowing the breach of duty claim, but not the fraud-based claims.
We review a decision to deny leave to amend under Federal Rule of Civil
Procedure 15(a) for abuse of discretion. Gentilello, 627 F.3d at 546; Fed. R. Civ.
P. 15(a). When considering whether to allow amendment, a court should
consider factors such as “undue delay, bad faith or dilatory motive on the part
of the movant, repeated failure to cure deficiencies by amendments previously
allowed, undue prejudice to the opposing party, and futility of amendment.” In
re Southmark, 88 F.3d 311, 315 (5th Cir. 1996).
We hold that the bankruptcy court’s decision to deny the amendment was
not an abuse of discretion. The Trustee’s unexplained delay in bringing these
claims weighs in favor of finding that the denial of amendment was proper. See
11
By this time, Robbye Waldron had replaced Jason Searcy as Trustee.
15
Case: 11-30462 Document: 00511805140 Page: 16 Date Filed: 03/29/2012
No. 11-30462
Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir. 2003) (stating that a
“litigant’s failure to assert a claim as soon as he could have is properly a factor
to be considered in deciding whether to grant leave to amend,” although noting
the litigant should not be “punished” for not presenting a claim as “promptly as
possible” (quotation marks and citation omitted)). The “newly” discovered
documents in this case had actually been available to the Appellants for a
significant amount of time.12 Other than noting that the current Trustee was
appointed somewhat recently, and pointing to the complexity and length of the
record, the Appellant offers little explanation for waiting to assert these claims.
Similarly, the newly added fraud claims would have dramatically altered
the subject matter of the suit at a late juncture. A court is often justified in
denying a motion for leave to amend when it would “fundamentally alter the
nature of the case.” Mayeaux v. La. Health Serv. & Indem. Co., 376 F.3d 420,
427 (5th Cir. 2004). As it stood, this suit was a fairly limited action to determine
whether A&R possessed a disqualifying conflict of interest, and potentially, the
amount of disgorgement. The fraud claims would not have been factually
similar to the disgorgement claim and they likely would have required expansive
discovery and litigation, thereby delaying resolution of the case. Accordingly, we
hold that the bankruptcy court did not abuse its discretion in denying in part the
motion for leave to file a third amended complaint. See Lozano v. Ocwen Fed.
Bank, FSB, 489 F.3d 636, 644 (5th Cir. 2007) (affirming denial of motion to
amend where plaintiff was not diligent in asserting claim for fraud and had
failed to take advantage of earlier opportunities to amend); Smith v. EMC Corp.,
12
The first two documents—copies of the consent agreement between GCA and AIPC,
and the Dividend Assignment—were actually available throughout the entire adversary
proceeding and were also known to the Equity Committee during the underlying bankruptcy
action. The third document—an email from Dean Ferguson to other lawyers at A&R—was
admitted over a year earlier, and it had been submitted to the court by the Trustee in
opposition to Appellee’s motion for partial summary judgment. Thus, the grounds for this
claim were actually known to the Appellant for at least a year, and likely for much longer.
16
Case: 11-30462 Document: 00511805140 Page: 17 Date Filed: 03/29/2012
No. 11-30462
393 F.3d 590, 595 (5th Cir. 2004) (citing “undue delay” as a factor weighing
against allowing amendment); Southmark, 88 F.3d at 315–16 (affirming denial
of motion to amend where plaintiff sought to add claim that it had knowledge of
for almost a year and stating that “[l]iberality in pleading does not bestow on a
litigant the privilege of neglecting her case for a long period of time”). 13
IV. CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
13
The bankruptcy court also found that the amendment was futile. Because we can
affirm the denial on other grounds, we need not decide whether the proposed third amended
complaint would have adequately stated a claim for fraud. See Stripling v. Jordan Prod. Co.,
LLC, 234 F.3d 863, 873 (5th Cir. 2000) (stating that an amendment is futile when it would fail
to state a claim).
17