Bankruptcy Trustee Application to Employ Counsel Must Show Benefit the Estate [11 USC 327(a)]

Objections to a Bankruptcy Trustee Hiring a Lawyer

There is a common myth that an objection to a bankruptcy trustee’s application to employ an attorney (counsel) is only proper if the attorney is not “disinterested,” a concept similar to being conflicted out of the case. In other words, many believe that not having an interest in the matter at issue is the only requirement of a bankruptcy trustee’s attorney.

However, this assumption is wrong. Rather, counsel for a bankruptcy trustee must show a benefit to the estate in addition to disinterestedness. Case law makes clear that: “Section 327(a) provides that court approval is necessary before a trustee can retain counsel. While the test of the disinterestedness of the attorney is one consideration for the court in determining whether to approve a trustee’s choice of attorney, nowhere in the statute is the court’s discretion limited to determinations of disinterestedness. Indeed, the purpose of § 327 is: ‘to insure in advance both that the person’s employment is necessary to the estate and that the person employed is disinterested and able to serve the best interests of the estate.’” In re Kurtzman, 220 B.R. 538, 541–42 (S.D.N.Y. 1998) (quoting In re That’s Entertainment Marketing Group, Inc., 168 B.R. 226, 229 (N.D.Cal.1994)).

“By its very nature, the ‘best interest of the estate’ under § 327(d) is a concept that affords the court considerable discretion in making evaluations and comparisons regarding the performance of counsel. In light of this discretion, the Court below was entitled to rely on its own first-hand observations and, based on those observations, to draw its own conclusions regarding professional performance. Here, the presiding judge was in a unique position to observe the conduct of counsel over a significant period of time, and to compare counsel’s performance with that of other attorneys performing similar work. The Court articulated and specified its concerns, which admittedly were of a conclusory nature, and afforded Appellant an opportunity to respond. Since the ‘right’ that Appellant seeks to vindicate rests in the final analysis with the discretion of the Court, we cannot conclude that the hearing afforded Appellant failed to meet constitutional standards.” In re Kurtzman, 220 B.R. 538, 541 (S.D.N.Y. 1998).

Accordingly, “disinterestedness need not be the exclusive test when evaluating the propriety of an attorney’s retention.” In re Vebeliunas, 231 B.R. 181, 194 (Bankr. S.D.N.Y. 1999).

One court applied this rationale to find that the proposed attorney was “ill-suited to serve as the trustee’s counsel because of his expressed prejudice against the debtor.” In re Vebeliunas, 231 B.R. 181, 195 (Bankr. S.D.N.Y. 1999).

Therefore, for a bankruptcy trustee’s choice of attorney to be successfully employed, counsel must not only be disinterested, but the employment of counsel must serve the best interests of the estate. If the trustee’s attorney would not benefit the bankruptcy estate, most notably its creditors, an objection to the employment is proper.

Contact a Bankruptcy Attorney with Experience with Bankruptcy Trustees

If you have further questions regarding a bankruptcy trustee employing counsel, contact a skilled bankruptcy attorney in Los Angeles, Orange County, San Francisco, Riverside, San Diego, San Jose, Sacramento, and Surrounding Areas in California.

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