Distinction Should Be Remembered To Avoid Forfeiture Of Fee Compensation.
U.S. Bankruptcy Judge Alan Jaroslovsky of the Northern District of California, in a short memorandum decision in In re Dixon, Case No. 09-11851 (Doc. #144, filed Sept. 19, 2010), gives a poignant reminder to all debtor bankruptcy attorneys representing individuals in Chapter 11 proceedings: you represent the bankruptcy estate, not the individual.
The importance of this distinction could mean the difference in obtaining bankruptcy court approval for fee compensation.
Apparently, bankruptcy counsel for the Chapter 11 estate defended the debtor’s claim of exemption of over $1 million in retirement funds over a creditor’s objection. Judge Jaroslovsky found this was a clear conflict of interest, but the real rub is that Chapter 11 counsel sought $8,000 in fee compensation for its efforts from the bankruptcy estate.
Judge Jaroslovsky observed he was fairly tolerant of Chapter 11 counsel assisting an individual debtor if no compensation is sought from the estate and if the actions taken are not contrary to the interests of the estate. However, he found that Chapter 11 counsel here had crossed the line and forgotten that its loyalties were owed to the estate.
The bankruptcy judge went on to observe that unpaid fees were subject to potential forfeiture for such a conflict, even though the court “has some discretion to forgive and forget.” He did just that to avoid financial disaster for Chapter 11 counsel. His ruling was to reduce counsel’s fees by the $8,000 expended to defend the exemption, although barring counsel from collecting them from the estate or individual debtor. He also ruled that any further conflicting actions would result is a complete forfeiture of all compensation in the case.
We thank reader Andrew L. Fagan for sending us this decision, which is a sober reminder that should not be lost on bankruptcy counsel representing individual debtors.