2004 | Cited 0 times | E.D. Virginia | August 10, 2004


At issue in this bankruptcy appeal is whether a law firm thatserved as special counsel to the trustee of a bankrupt debtor'sestate may be compensated for its services to the trustee fromthe debtor's estate when the law firm simultaneously representedone of the debtor's creditors. More specifically, the questionspresented are: (i) whether the bankruptcy court erred in awarding compensation to the appellee law firm for work the firm performed for the trustee even though the firm also simultaneously represented a creditor of the debtor on the ground that the firm's dual representation presented no actual conflict of interest; and (ii) whether the bankruptcy court erred in ruling that the appellee law firm's amended application for compensation as counsel for the trustee included no request for compensation for work the firm performed for its creditor-client. I.

In December 1998, Helen M. Cunningham engaged the services of asole-practitioner attorney, Robert Barth, to collect a debt owedto her by Delores and David Johnson. The Johnsons' debt toCunningham was evidenced by a Note and secured by a Deed of Truston property owned by the Johnsons at 1211 U Street N.W. ("UStreet property") in the District of Columbia. Cunningham agreedin writing to pay Barth a contingency fee of thirty percent (30%)of any amount Barth collected on the Note. Thereafter, Barthretained the law firm of Richter, Miller & Finn ("RMF") to assisthim in collection of the debt. Barth and RMF agreed orally toshare the contingent fee on a quantum meruit basis.

Cunningham, by counsel RMF, initiated an action on January 22,1999 against Delores and David Johnson in the United StatesDistrict Court for the Eastern District of Virginia to collectthe amount due on the Note ("Cunningham action"). After DeloresJohnson filed a voluntary petition for bankruptcy pursuant toChapter 7 of the Bankruptcy Code in the bankruptcy court in thisdistrict on February 10, 1999, proceedings against DeloresJohnson in the Cunningham action were automatically stayedpending disposition of Mrs. Johnson's bankruptcy case. See11 U.S.C. § 362(a). Cunningham, by counsel RMF, filed a motion inthe bankruptcy court on October 5, 1999, to obtain relief fromthe automatic stay of the proceedings in this district so thatCunningham could foreclose on the U Street property. Thebankruptcy court granted Cunningham's motion. See In reJohnson, Case No. 99-10629 (Bankr.E.D.Va. Nov. 18, 1999)(Order). Thereafter, Cunningham, by counsel RMF, initiatedforeclosure proceedings on the U Street property and purchasedthe property at the foreclosure sale on January 12, 2000.Cunningham's efforts since then to sell the property have beenunsuccessful. On May 11, 1999, a default judgment entered against DavidJohnson in the Cunningham action in the amount of $757,173.12.See Cunningham et al. v. Johnson et al., Case No. 1:99cv72(E.D.Va. May 11, 1999) (Default Judgment). Thereafter,Cunningham, by counsel RMF, pursued proceedings to collect thedefault judgment from David Johnson until those proceedings werealso automatically stayed on January 17, 2001 when Mr. Johnsonfiled a voluntary petition for bankruptcy pursuant to Chapter 11.See 11 U.S.C. § 362(a).

On May 17, 1999, Cunningham, by counsel RMF, initiated anadversary proceeding in the bankruptcy court seeking to denyDelores Johnson's discharge pursuant to 11 U.S.C. § 727. Thisaction succeeded and, on September 19, 2000, the bankruptcy courtentered an order denying Delores Johnson's discharge. See In reJohnson, Case No. 99-10629 (Bankr.E.D.Va. Sept. 19, 2000)(Order).

On April 16, 2001, the bankruptcy court converted DavidJohnson's Chapter 11 case to a Chapter 7 case and consolidated itwith Delores Johnson's pending Chapter 7 case. See In reJohnson, Case No. 99-10629 (Bankr.E.D.Va. Apr. 16, 2001)(Order). The bankruptcy court also concluded at that time that,even after the foreclosure sale of the U Street property, theJohnsons still owed Cunningham approximately $396,000, thedifference between the $757,173.12 default judgment and the saleprice of the U Street property at foreclosure.

In late 2000, shortly after the bankruptcy court denied DeloresJohnson's discharge, Robert O. Tyler, the Trustee in Mrs.Johnson's bankruptcy case, sought to retain RMF to serve asspecial counsel to the Trustee in connection with the Trustee'sefforts to recover property and assets of the estate. In thecourse of discussions with RMF regarding RMF's retention in thisregard, RMF disclosed to the Trustee the nature and extent of thefirm's representation of Cunningham. RMF also told the Trustee that the firm, inconnection with its representation of Cunningham, had acquiredsubstantial, non-confidential information relating to DeloresJohnson's business affairs, including her assets and liabilities.Indeed, the Trustee sought to retain RMF not only because ofRMF's expertise in bankruptcy law, but also because RMF hadspecific knowledge of the facts of the case. Prior to agreeing toserve as special counsel, RMF also informed Cunningham and herpersonal elder care attorney, Richard Snowdon, of the Trustee'srequest to retain the firm. Cunningham consented to the dualrepresentation after obtaining the advice of Snowdon.

Thereafter, on February 16, 2001, the Trustee filed anapplication pursuant to Rule 2014, F.R.Bankr.P., to obtainthe bankruptcy court's approval for the employment of RMF asspecial counsel.1 The Trustee's Rule 2014 applicationappropriately disclosed that RMF also represented Cunningham inconnection with the latter's efforts to collect a debt owed bythe Johnsons. Four days later, on February 20, 2001, thebankruptcy court entered an order approving the Trustee'sapplication and authorizing RMF's employment as special counselretroactive to January 1, 2001. See In re Johnson, Case No.99-10629 (Bankr.E.D.Va. Feb. 20, 2001) (Order). Between January2001 and September 2002, RMF worked approximately 600 hours as special counsel to the Trustee collecting, as a result,over $1.8 million in assets on behalf of the bankruptestate.2

On September 17, 2002, Edward Laios filed a proof of claim asan unsecured creditor to recover a debt owed to him by theJohnsons. The debt was evidenced by a Note and secured by a Deedof Trust on property owned by the Johnsons on Georgia Avenue inthe District of Columbia ("Georgia Avenue property"). Laios wasunable to enforce his security interest in the Georgia Avenueproperty because the District of Columbia had foreclosed on theproperty for failure of the debtors to pay real estate taxes.Before Laios filed his proof of claim, but after the property hadbeen sold at the tax sale, the Trustee initiated an adversaryproceeding in the bankruptcy court to attempt to recover theGeorgia Avenue property for the benefit of the estate. TheTrustee subsequently sought leave of court to abandon thatproceeding for reasons not fully disclosed in the record andwhich, in any event, are immaterial to the resolution of thismatter. On October 31, 2002, Cunningham, by counsel RMF, objectedto Laios' proof of claim and sought to reduce Laios' unsecuredclaim by between $300,000 and $400,000, the estimated value ofthe property, on the ground that Laios unreasonably failed totake action to enforce his security interest in the property andthus should not be permitted to recover that amount as anunsecured creditor of the Johnsons. Although the Trustee hadobjected to the proof of claim on other grounds, he neitherjoined nor opposed Cunningham's objection. On April 2, 2003, thebankruptcy court entered an order disallowing the Laios claim inits entirety.3 See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va. April 2, 2003) (Order).

On September 25, 2003, RMF filed an Application forCompensation and Reimbursement pursuant to Rule 2016, F.R.Bankr.P., requesting total compensation of $209,834.47 for workperformed as special counsel to the Trustee.4 This amountincluded $190,046 for legal services provided, and $19,788.47 inexpenses incurred, on behalf of both the Trustee and Cunningham.The bankruptcy court rejected the application on the ground thatRMF was not entitled to recover from the estate for legalservices provided to, and expenses incurred on behalf of,Cunningham. See In re Johnson, Case No. 99-10629 (Bankr.E.D.Va.Nov. 5, 2003) (Order). Thereafter, on December 1, 2003, RMF filedan Amended Application for Compensation pursuant to Rule 2016, F.R.Bankr.P., which requested total compensation of$127,472.03. According to the Amended Application, this amountincluded no claim for fees or expenses incurred in connectionwith the firm's representation of Cunningham, but covered insteadonly $125,316 for legal services rendered to the Trustee and$2,156.03 in expenses incurred in connection with performingthose legal services. On February 2, 2004, the bankruptcy courtconducted a full evidentiary hearing on RMF's AmendedApplication. Delores Johnson and Laios objected to the AmendedApplication on the grounds (i) that RMF's representation ofCunningham and the Trustee presented a conflict of interest and(ii) that RMF's Amended Application requested compensation forduplicative services performed for Cunningham and the Trustee.The Trustee did not object to the Amended Application. On February 11, 2004, the bankruptcy court issued an orderoverruling all objections and granting RMF's Amended Applicationfor compensation. See In re Johnson, Case No. 99-10629(Bankr.E.D.Va. Feb. 11, 2004) (Order). At issue here is theJohnsons' appeal from that order on the same grounds DeloresJohnson initially asserted in opposition to the AmendedApplication, namely (i) that RMF's dual representation presenteda disabling conflict of interest and (ii) that RMF's AmendedApplication requested compensation for duplicative services.


A district court's scope of review of a bankruptcy court'sorder is well-established. Whereas a bankruptcy court's findingsof fact are reviewed only for clear error, its conclusions of laware subject to de novo review. See In re Southeast HotelProp., L.P., 99 F.3d 151, 154 (4th Cir. 1992); In re Johnson,960 F.2d 396, 399 (4th Cir. 1992). Mixed questions of law andfact are also reviewed de novo. See In re Litton, 330 F.3d 636,642 (4th Cir. 2003).

At issue here is (i) whether the bankruptcy court erred inapproving RMF's Amended Application for compensation as specialcounsel to the Trustee given RMF's simultaneous representation ofCunningham and (ii) whether the bankruptcy court erred in rulingthat RMF's Amended Application for compensation did not requestdual compensation for work the firm had also performed forCunningham. The conflict of interest issue is a mixed question oflaw and fact and thus is subject to de novo review. The dualcompensation issue is a factual finding and thus is reviewed onlyfor clear error. III.

Section 330(a) of the Bankruptcy Code governs the compensationof professional persons employed by the trustee, estate, ordebtor-in-possession in a bankruptcy action. Specifically, itprovides that: The [bankruptcy] court may award . . . to a professional person employed under section 327 or 1103 of this title . . . reasonable compensation for actual, necessary services rendered by such . . . professional person, or attorney . . . and reimbursement for actual, necessary expenses.11 U.S.C. § 330(a); see also In re Federated Dept. Stores,Inc., 44 F.3d 1310, 1319-20 (6th Cir. 1995) (stating thatbankruptcy court has authority under § 330(a) to award fees andcompensation to professional persons employed by debtor); In reAOV Indus., Inc., et al., 797 F.2d 1004, 1008 (D.C. Cir. 1986).As the terms of § 330 make clear, an attorney or otherprofessional person employed by a trustee is not entitled tocompensation under § 330(a) unless that individual or firm isvalidly employed under § 327. Section 327, in turn, under certaincircumstances, prohibits the employment of a professional personoperating under a conflict of interest.5 Thus, even where, as here, the professional's employment was previouslyapproved by the bankruptcy court under § 327, § 330(a) mandatesthat, before awarding compensation, the bankruptcy court take a"second look" at the validity of the employment under § 327before awarding compensation. In re Delaney House, LLC, 2004 WL1637208, at *3 (citing In re Engel, 124 F.3d at 571). Indeed,"`[s]ection 327 approvals are merely preliminary go aheads ratherthan conclusive determinations'" regarding compensation. In reEngel, 124 F.3d at 572 (quoting In re Johns-Manville Corp.,32 B.R. 728, 731 (S.D.N.Y. 1983)). Thus, the § 327 determinationwith respect to RMF must be revisited here.

Section 327 governs bankruptcy court approval of a trustee'semployment of attorneys and other professionals.6 Thisprovision is intended to ensure "that all professionals . . .tender undivided loyalty and provide untainted advice and assistance infurtherance of their fiduciary responsibilities." Rome v.Braunstein, 19 F.3d 54, 58 (1st Cir. 1994). And while theprovision accords the bankruptcy court broad discretion inapproving the employment of professionals,7 § 327(a)makes clear, as a general rule, that a trustee may employ, andthe bankruptcy court may approve, the employment of an attorneyor other professional person only if that individual or firm (i)does not hold or represent an interest adverse to the estate and(ii) is disinterested. 11 U.S.C. § 327(a); In re Harold &Williams Dev't. Co., 977 F.2d at 909.8 This is astringent standard. Yet, § 327(c), which governs the employment of anattorney or professional who represents a creditor, creates alimited exception to this general rule.9 Pursuant to thatprovision, an attorney who represents a creditor is validlyemployed by the trustee provided that there is no "actualconflict of interest" between the attorney's representation ofthe creditor and his representation of the trustee. See11 U.S.C. § 327(c); In re Interwest Bus. Equip., Inc.,23 F.3d 311, 316 (10th Cir. 1994) ("[T]he bankruptcy judge can disqualifya professional solely on the basis of simultaneousrepresentation, if it finds the joint representation creates anactual conflict.") (emphases in original). Thus, where a trusteeemploys a professional who represents a creditor, the stringenttwo-pronged test set forth in § 327(a) does not apply. Seesupra note 9. Put differently, a trustee may employ a creditor'sattorney under § 327(c) provided the dual representation presents no actual conflict of interest. And, thisis so even if there exists a potential conflict of interest or anappearance of a conflict of interest that would otherwisedisqualify the attorney from employment under § 327(a).10

It is worth noting that some courts have disagreed on whether §327(c) is an exception to the general rule set forth in § 327(a)or is instead an additional requirement that must be met when thetrustee seeks to employ an attorney that represents acreditor.11 While the Fourth Circuit has not addressed orresolved this issue, the statutory language and legislativehistory support the conclusion reached here, namely that § 327(c)is an exception to § 327(a). See H.R. Rep. No. 95-595 at 328,reprinted in 1978 U.S.C.C.A.N. (95 Stat.) 6284 ("Subsection (c)is an additional exception [to § 327(a)]."). A focus solely onthe statutory language supports this result because it is apparent that § 327(c) is a subset of theuniverse of situations described in § 327(a). Thus, an attorneywho is disinterested and has no interest adverse to the estate afortiori has no actual conflict of interest. By contrast, anattorney whose representation of both a creditor and the trusteepresents no actual conflict of interest would seem nonetheless,as the creditor's attorney, to represent an interest adverse tothe estate and may also not qualify as disinterested. So, itfollows that by allowing a trustee to retain a creditor'sattorney provided there is no actual conflict of interest, §327(c) carves out an exception to the broad requirements of §327(a) that is limited to creditor's attorneys. And, legislativehistory confirms that this is precisely what Congress intended toaccomplish by enacting § 327(c).12 Thus, Congress amended§ 327(c) in 1984 to provide "greater flexibility to the trusteein hiring a professional person. . . ." In re Unitcast, Inc.,214 B.R. at 987 (citing S. Rep. No. 65, 98th Cong., 1st Sess. 75(1983)).13 Indeed, Congress had become concerned that itwas becoming increasingly difficult in large bankruptcy actionsfor trustees to find and employ the services of a competent andexperienced bankruptcy attorney who was not also representing acreditor. See 3 Collier on Bankruptcy ¶ 327.04[7][b]. Section 327(c) was intended to broaden thetrustee's choices to include these attorneys provided there wasno "actual conflict of interest."

In this instance, appellants attack the bankruptcy court'sdecision approving RMF's Amended Application for compensation onthe ground that RMF was operating under an actual conflict ofinterest because it was representing both the Trustee andCunningham, a creditor. Thus, the task here is to determinewhether there was in fact an actual conflict of interest. If so,RMF was not validly employed under § 327(c) and thus may not becompensated under § 330(a). If there was no actual conflict ofinterest, however, RMF was validly employed under § 327(c) andthe bankruptcy court did not err in approving RMF's compensationon this ground.14 Worth noting in this regard is that thedetermination as to whether an actual conflict of interestexisted in this case must be guided by federal bankruptcy law andnot state law. State law, including state rules of professional conduct, although perhapsinformative, are not determinative.15

The term "actual conflict of interest" is not defined in theBankruptcy Code. See In re BH & P Inc., 949 F.2d 1300, 1315 (3dCir. 1991). Instead, the term "has been given meaning largelythrough a case-by-case evaluation of particular situations in thebankruptcy context." Id. In this regard, "[c]ourts have beenaccorded considerable latitude in using their judgment anddiscretion in determining whether an actual conflict exists `inlight of the particular facts of each case.'" Id. (citing Inre Star Broadcasting, Inc., 81 B.R. 835, 844 (Bankr.D.N.J. 1988)and In re Hoffman, 53 B.R. 564, 566 (Bankr.W.D.Ark. 1985)).Notably, courts have declined to set forth bright line rules asto when an alleged conflict warrants disqualification under §327(c). See In re BH & P, Inc., 949 F.2d at 1315. It isnonetheless sensible to conclude that an alleged conflict ofinterest is "actual" and warrants disqualification under § 327(c)if there is "active competition between two interests, in whichone interest can only be served at the expense of the other."See In re BH & P, Inc., 103 B.R. 556, 563 (Bankr.D.N.J. 1989),aff'd 949 F.2d 1300 (3d Cir. 1991).16

Accordingly, where, as here, an attorney is employed by boththe trustee and a creditor, there is no "actual conflict ofinterest" warranting disqualification unless (i) the interests ofthe trustee and the creditor are in fact directly conflicting17 or(ii) the creditor is actually afforded a preference that isdenied to other creditors.18 A conflict "in which thecompetition is presently dormant, but may become active ifcertain contingencies occur," is merely potential and thus doesnot warrant disqualification. See In re BH & P, Inc., 103 563.

These principles, applied here, point persuasively to theconclusion that no actual conflict of interest existed here.Simply put, the interests of the Trustee and Cunningham did notconflict; they coincided; both were interested in enlarging theestate.19 Thus, by seeking to enlarge the estate onbehalf of the Trustee, RMF served both the interests of theTrustee and Cunningham.

Appellants nonetheless argue unpersuasively that an actualconflict of interest existed on three grounds: (i) RMF's award ofcompensation from the estate detracted from Cunningham's recoveryas a creditor of the estate; (ii) RMF represented Cunningham on acontingency fee basis pursuant to RMF's oral agreement withBarth; and (iii) RMF failed to comply with Rule 1.7(a) of theVirginia Rules of Professional Conduct.20 To begin with,the fact that RMF's compensation from the estate may detract from Cunningham's recovery does notcompel the conclusion that there was an actual conflict ofinterest. Such a conclusion would disqualify all law firmsrepresenting creditors from employment by the trustee, therebyimpermissibly rendering § 327(c) a dead letter. See11 U.S.C. § 327(c) (stating that a professional is not disqualified fromemployment by the trustee because he represents a creditor unlessthere is an actual conflict of interest).21 Moreover,such a conclusion ignores that Cunningham's recovery would in anyevent be lessened by the compensation paid to any professionalemployed by the Trustee, even if that professional did not alsorepresent her. Cunningham is not worse off because thatcompensation is provided to her own counsel. Nor is it sensibleto conclude in this instance that the contingency fee arrangementgave rise to an actual conflict. Regardless of how RMF were to bepaid, RMF would have sought to recover Cunningham's debt from theestate to the best of its ability. Finally, even assumingarguendo that RMF failed to comply with Rule 1.7(a) of theVirginia Rules of Professional Conduct, an assumption notsupported by the record evidence, that assumption would notcompel the conclusion that there was an actual conflict, as theconflicts determination must be governed by federal bankruptcylaw, not state rules of professional conduct.22 Although not argued by the parties, it is worth considering insomewhat greater detail whether RMF's representation ofCunningham with regard specifically to her objection to Laios'proof of claim concerning the Georgia Avenue property presentedan actual conflict of interest. While RMF's representation ofCunningham in objecting to the proof of claim was undoubtedlycontrary to the interests of Laios, another creditor, it does notfollow, in the instant circumstances, that RMF's dualrepresentation of Cunningham and the Trustee gave rise to anactual conflict of interest. This is so for various reasons,including (i) that the existing record does not indicate thatthis representation gave rise to any actual conflict of interest,(ii) that the Trustee, on behalf of all creditors, did not opposeCunningham's objection to Laios' proof of claim on this basis,and indeed joined in objecting to the claim albeit on differentgrounds, and (iii) that neither Laios nor appellants raised thisissue in objecting to the Amended Application or the bankruptcycourt's award of compensation. Moreover, it is important toconsider that a trustee, as representative of all of thecreditors of the estate, necessarily must balance the interestsof all the creditors for the benefit of the estate as a whole,and thus must in many instances subordinate one creditor's claimto another's. See 3 Collier on Bankruptcy ¶ 323.02[1](stating that the trustee "is the sole representative of theestate, [and] represents all the creditors of the estategenerally. . . ."). To conclude that an actual conflict ariseswhen an attorney simultaneously representing a creditor and atrustee seeks, on behalf of the creditor, to subordinate theclaim of another creditor, compels the conclusion, contrary to §327(c), that an attorney could never simultaneously represent a creditor and a trustee, as bankruptcycases not infrequently require a trustee to act against theinterests of some creditors for the benefit of the estate as awhole. See id. For these reasons, therefore, RMF'srepresentation of Cunningham and the Trustee did not present orcreate an actual conflict of interest and the bankruptcy courtaccordingly did not err in concluding that RMF, as Trustee'sspecial counsel, met the requirements of §§ 327(c) and 330(a) andwas thus entitled to compensation.23 IV.

As set forth above, § 330 of the Bankruptcy Code allows abankruptcy court to award a professional person performingservices for the trustee "reasonable compensation" for thoseservices. 11 U.S.C. § 330(a)(1). The statute itself and authorityinterpreting this provision makes clear that courts must notaward compensation for duplicative services. See11 U.S.C. § 330(a)(4)(A)(i) ("[T]he court shall not allow compensation forunnecessary duplication of services. . . .").24 Thisprohibition against "double compensation" includes compensationfor services that are duplicative (i) because they were performedby the same individual for two different clients and then billedto both clients and (ii) because they were performed by twodifferent individuals for the same client and billed more thanonce. In this instance, the bankruptcy court, after anevidentiary hearing, concluded that RMF's Amended Application forcompensation did not include duplicative services and thusawarded the requested compensation. Because this determination isa factual finding, the task here is to determine whether it isclearly erroneous. See In re Southeast Hotel Prop., L.P., 99F.3d at 154 (stating that the bankruptcy court's factual findings are reviewed for clear error); In reJohnson, 960 F.2d at 399 (same).

A review of the bankruptcy court record makes clear that thebankruptcy court did not err in concluding that RMF's AmendedApplication requested compensation for substantially identicalservices either (i) performed by an RMF attorney for bothCunningham and the Trustee or (ii) performed by more than one RMFattorney for the Trustee. Richter's testimony at the bankruptcycourt hearing made clear that RMF's Amended Application did notinclude duplicative services. That RMF's Amended Application,which ostensibly included only services performed on behalf ofthe Trustee, requested substantially less compensation than theinitial application, which clearly included services performedfor both Cunningham and the Trustee, supports Richter's testimonythat the services performed for the Trustee set forth in theAmended Application were not duplicative of services performedfor Cunningham.25 Nor does it appear that the bankruptcycourt erred in concluding that the Amended Application did notmistakenly include duplicative hours as Richter testified thatRMF carefully maintained separate time and billing records (i)for work performed for Cunningham and the Trustee and (ii) foreach of its attorneys. That RMF's records indicate that twoattorneys worked simultaneously in representing the Trustee doesnot compel a different conclusion in this regard as it isreasonable given the complexity of this bankruptcy action that therepresentation would require the services of more than oneattorney and that these attorneys would need to engage in ongoinginter-office conferences.26 Accordingly, for thesereasons, the bankruptcy court's determination that the AmendedApplication did not include charges for duplicative services wasnot clearly erroneous.27


For the reasons set forth herein, appellants' appeal must bedenied and the bankruptcy court's order approving RMF's AmendedApplication for compensation and awarding compensation for legalservices rendered to the Trustee in the amount of $125,316 and reimbursement of expenses in the amount of $2,156.03 must beaffirmed.

An appropriate order will issue.

1. Rule 2014, F.R.Bankr.P., provides, in pertinent part,as follows: An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to § 327, § 1103, or § 1114 of the Code shall be made only on application of the trustee or committee. . . . The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, 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.

2. When the assets of the estate were ultimately distributed,Cunningham received $158,000 from the estate in satisfaction ofher $396,000 claim.

3. The current appeal record does not disclose the grounds forthis disallowance, nor are those grounds material to thedisposition of the issues at bar.

4. Rule 2016, Fed.R. Civ. P., provides, in pertinent part, asfollows: An entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested.

5. See In re Big Rivers Elec. Corp., 355 F.3d 415, 435 (6thCir. 2004); In re Federated Dept. Stores, Inc., 44 F.3d at 1320(stating that § 330(a) "clearly requires a valid professionalappointment under § 327(a) as a prerequisite to an award ofcompensation") (citing In re EWC, Inc., 138 B.R. 276, 282-83(Bankr.W.D. Okla. 1992)); In re AOV Indus., Inc., et al., 797F.2d at 1008 (stating that a law firm's request for fees under §330(a) may be denied upon "a finding that counsel had a conflictof interest in representing the estate"); In re Unitcast, Inc.,214 B.R. 979, 988 (N.D. Ohio July 1, 1997) ("[A] validappointment under § 327 is a condition precedent for and [sic]award of compensation under § 330.") (citing In re FederatedDept. Stores, Inc., 44 F.3d at 1320); Textile Indus., Inc.,198 B.R. 902, 904-05 (Bankr.M.D.N.C. April 5, 1996) (consideringwhether law firm was validly employed under § 327 in determiningwhether to award compensation under § 330(a)). Notably, courts make clear that an order approving aprofessional's employment under § 327 does not guarantee that theprofessional will be compensated under § 330(a). See In reEngel, 124 F.3d 567, 571 (3d Cir. 1997) ("Approval under § 327establishes only that an attorney may be employed by thedebtor-in-possession, and not that his employment will thereforeor thereafter be compensated from estate funds.") (emphasis inoriginal); In re Delaney House, LLC, 2004 WL 1637208, at *3(Bankr.D.Mass. July 9, 2004) (citing In re Engel, 124 F.3d at571); In re Briarwood Manor, Inc., 239 B.R. 709, 718 n. 12(Bankr.D.N.J. 1999) ("Even if Applicant had received prior courtauthorization to act as counsel to the former Debtor inpossession or the Trustee, that would not guarantee allowance ofits claim."); 3 Collier on Bankruptcy ¶ 327.03[2][c] (15th ed.)("It should be noted that entry of an order approving theretention of a professional does not establish a right to be paidby the bankruptcy estate."). At least one court has relied on the statutory language itselfto support the principle that a bankruptcy court must not awardcompensation pursuant to its authority under § 330 to aprofessional who operates under a conflict of interest and thuswould not pass muster under § 327. Specifically, the SixthCircuit reasons that by directing the bankruptcy court to awardonly "reasonable compensation," § 330(a) makes clear that afiduciary employed by the trustee must be free from any conflictof interest. See In re Big Rivers Elec. Corp., 355 F.3d at 436(citing Wolf v. Weinstein, 372 U.S. 633, 642 (1963)). Moreover,that Congress formulated a two-step process, namely (i) approvalof appointment under § 327 and (ii) approval of compensationunder § 330, also supports this principle.

6. The relevant sections of § 327 provide as follows: (a) Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties under this title. (c) In a case under chapter 7, 12, or 11 of this title, a person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.11 U.S.C. § 327(a) & (c); see also In re Arochem Corp.,176 F.3d 610, 616 (2d Cir. 1999) (assessing whether bankruptcycourt's approval of special counsel to the trustee was properunder § 327).

7. See In re Harold & Williams Dev't. Co., 977 F.2d 906, 909(4th Cir. 1992) ("Although the Code vests in the bankruptcytrustee the immediate power to select candidates for employmentby the bankruptcy estate, it gives broad discretion to thebankruptcy court over the appointment of professionals to work onbehalf of the trustee and the estate, in part by empowering thecourt to approve candidates so selected.") (citing In reMartin, 817 F.2d 175, 182 (1st Cir. 1987)).

8. The Bankruptcy Code defines a "disinterested person" as "aperson that — (E) does not have an interest materially adverse tothe interest of the estate or of any class of creditors or equitysecurity holders, by reason of any direct or indirectrelationship to, or connection with, or interest in, the debtor. . . or for any reason." 11 U.S.C. § 101(14). While the Codedoes not define the adverse interest prong on the § 327(a)two-pronged test, courts have stated that a professional "hold[s]or represent[s] an interest adverse to the estate" if he or she(1) "hold[s] or assert[s] any economic interest that would tendto reduce the value of the bankruptcy estate or that would giverise to an actual or potential dispute in which the estate is arival claimant," or (2) "possess[es] a predisposition undercircumstances that render such predisposition a bias against theestate." In re Dev't Corp. of Plymouth, Inc., 283 B.R. 464, 469(Bankr.E.D.Mich. 2002) (citing In re C.F. Holding Corp.,164 B.R. 799 (Bankr.D.Conn. 1994) and In re Roberts, 46 B.R. 815(Bankr.D.Utah 1985), aff'd in relevant part and rev'd in part onother grounds, 75 B.R. 402 (D.Utah 1987)); 3 Collier onBankruptcy ¶ 327.04[2][b] (citing In re American Printers &Lithographers, Inc., 148 B.R. 862, 864 (Bankr.N.D. Ill. 1992)and In re Envirodyne Indus., Inc., 150 B.R. 1008, 1016-17(Bankr.N.D.Ill. 1993)). And while not directly relevant here, it is worth noting thatsome courts treat the two prongs of § 327(a) as a single inquirywhile others treat them as distinct. Compare In re Porter,52 B.R. 692, 696 (Bankr.E.D.Va. 1985) ("Accordingly, the debtor'stwo grounds of disqualification in this case, i.e., thatSheeran represents an interest adverse to the estate and Sheeranis not disinterested, are not entirely separate inquiries."); 3Collier on Bankruptcy ¶ 327.04[2] ("Courts have recognized thatthere is an overlap in the two prongs of section 327(a). . . .")with In re Arochem Corp., 176 F.3d at 629 (noting that thefirst prong of the test relates to professional's personalinterests as well as the interests of the professional's clientswhereas the second prong of the test refers only toprofessional's personal interests).

9. See H.R. Rep. No. 95-595 at 328, reprinted in1978 U.S.C.C.A.N. (95 Stat.) 6284 ("Subsection (c) is an additionalexception [to § 327(a)]. The trustee may employ as his counsel anon-disinterested person if the only reason that the attorney isnot disinterested is because of his representation of anunsecured creditor."); In re Arochem Corp., 176 F.3d at 624;In re Crivello, 134 F.3d 831, 835 (7th Cir. 1998) (stating that"[t]he Code contains three limited exceptions to this generalrule [§ 327(a)]" including § 327(c)); In re Dunes Hotel Assoc.,1997 WL 33344280, at *7 (Bankr.D.S.C. Dec. 15, 1997) ("Section327(c) contains a limited exception to the general rule of §327(a)."); 3 Collier on Bankruptcy ¶ 327.04[7][b] ("[S]ection327(c) recognizes that it is not necessary that an attorney orother professional person who has represented or who currentlyrepresents a creditor of the debtor automatically be deemedeither adversely interested or not disinterested and, therefore,disqualified for employment by the trustee. In such cases, theexception in section 327(c) becomes operable. . . .").

10. Notably, authority establishes that § 327(a), as opposedto § 327(c), is intended to broadly prohibit the employment of aprofessional person not only when there is an actual conflict,but also when there is a potential conflict or an appearance of aconflict. See In re Rabex Amuru of North Carolina, Inc.,198 B.R. 892, 895-97 (Bankr.M.D.N.C. 1996); In re Garza, 1994 WL282570, at *2 (Bankr.E.D.Va. Jan. 19, 1994); In re WVS,Investment Joint Venture, 1990 WL 191864, at *2 (D.Colo. Jan. 4,1990) ("Section 327[(a)] is intended to address the appearance ofimpropriety as much as its substance, to remove the temptationand opportunity to do less than duty demands. It is intended toprevent even the appearance of conflict, irrespective of theintegrity of the person or firm under consideration.") (citationsomitted); but see In re Marvel Entm't Group, Inc.,140 F.3d 463, 476 (3d Cir. 1998) (holding that while a court maydisqualify a professional under 327(a) for a potential conflictof interest, "the court has no authority to disqualify aprofessional solely on the basis of an appearance of aconflict").

11. Compare supra note 4 with In re Marvel Entm't Group,Inc., 140 F.3d at 476-77 (blurring distinction between § 327(a)and § 327(c)); In re Interwest Bus. Equip., Inc., 23 F.3d at316 ("The requirements of subsection (a) are thresholdrequirements to be met even if subsection (c) is implicated.");In re Dev't Corp. of Plymouth, Inc., 283 B.R. at 468 (statingthat § 327(c) "`does not preempt the more basic requirements ofsubsection (a)'") (quoting In re Interwest, 23 F.3d at 316);In re Perkey, 194 B.R. 846, 851 (W.D. Mo. 1996) ("The attorneymust meet the requirements of section 327(a) before considerationof the attorney's employment under section 327(c) comes intoplay.").

12. See supra note 8 and accompanying text.

13. Prior to the passage of the Bankruptcy Amendments andFederal Judgeship Act of 1984, § 327(c) per se disqualified theemployment by the trustee of a professional that at the time ofthe bankruptcy action represented a creditor in connection withthe bankruptcy action. It provided: In a case under chapter 7 or 11 of this title, a person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, but may not, while employed by the trustee, represent, in connection with the case, a creditor.See also 3 Collier on Bankruptcy ¶ 327.LH[7] ("Prior to the1984 amendments, a person, while employed by the debtor or thetrustee, could not represent a creditor in connection with thecase irrespective of whether or not an actual conflict ofinterest existed.").

14. Because the validity of RMF's employment depends onwhether there was an "actual conflict of interest" under §327(c), and not whether RMF meets both prongs of the test setforth in § 327(a), it is not proper to assess whethercompensation may be denied under § 328(c) which allows thebankruptcy court to deny compensation to a professional (i) whois not disinterested or (ii) who "represents or holds an interestadverse to the interest of the estate with respect to the matteron which such professional person is employed," as that provisionexpressly exempts professionals who represent creditors and thusare employed under § 327(c). 11 U.S.C. § 328(c) ("Except asprovided in section 327(c) . . . the court may deny allowance ofcompensation for services and reimbursement of expenses of aprofessional person employed under section 327 or 1103 of thistitle if, at any time during such professional person'semployment under section 327 or 1103 of this title, suchprofessional person is not a disinterested person, or representsor holds an interest adverse to the interest of the estate withrespect to the matter on which such professional person isemployed."); see also In re U.S. Jet, Inc., 127 B.R. 11, 13(Bankr.E.D.Va. 1991) ("Despite court approval of employment,however, § 328(c) provides that a court may deny allowance ofcompensation to an approved professional person if that personturns out not to be a disinterested person or represents or holdsan interest adverse to the estate with respect to the matter onwhich the professional person was employed. Section 328(c)excepts from this rule persons who may qualify under §327(c).").

15. Thus, appellants' reliance on the definition of "conflictof interest" set forth in Wilson v. Chemical Corp., 456 F. Supp. 249,256 (E.D.Va. 1978), a federal employment discriminationcase, and Rule 1.7(a) of the Virginia Rules of ProfessionalConduct are not determinative here.

16. For example, in In re Pillowtex, Inc., 304 F.3d 246, 252(3d Cir. 2002), the Third Circuit held that a law firmrepresenting a debtor and a creditor had an actual conflict ofinterest where the law firm received a payment from the debtor of$250,000 for antecedent legal work less than ninety days beforethe bankruptcy filing and thus was in essence also a creditor.This was so because the law firm's interest as a creditorconflicted with the debtor's interest to reduce payments to itscreditors. See id. In In re Arochem Corp., 176 F.3d at 624,the Second Circuit held that no actual conflict of interestexisted when a law firm represented both the debtor and acreditor on the ground that the firm represented the creditor ina separate, unrelated lawsuit. See id.

17. See In re BH & P, Inc., 949 F.2d at 1316 (stating that afactor courts must consider in assessing a conflict of interestof a professional representing two estates in a bankruptcy actionis "whether the interests of the related estates are parallel orconflicting").

18. See In re Pillowtex, Inc., 304 F.3d at 252 ("The receiptof a preference by a creditor thus creates a conflict with unpaidcreditors, whose share of the remaining assets is diminished bythe payment.").

19. See Stoumbos v. Kilimnik, 988 F.2d 949, 964 (9th Cir.1993) (holding that the interests of the trustee and creditor"coincide[d]" because "if money is recovered for the estate, [thecreditor's] pro rata recovery will ultimately be greater" suchthat there was no actual conflict of interest).

20. Rule 1.7(a) of the Virginia Rules of Professional Conductgoverns conflicts of interest and provides as follows: (a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another existing client, unless: (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and (2) each client consents after consultation.

21. See also Commodity Futures Trading Comm'n v. Baragosh,278 F.3d 319, 327 (4th Cir. 2002) ("Such an interpretation wouldbe directly at odds with a cardinal rule of statutoryconstruction — `that a statute should be interpreted so as not torender one part inoperative.'") (quoting Mountain States Tel. &Tel. v. Pueblo of Santa Ana, 472 U.S. 237, 249 (1985)).

22. See Koffman v. Osteoimplaint Tech., 182 B.R. 115, 125(D.Md. 1995) (holding that state tort suits are preempted byfederal bankruptcy law on the ground that "[a]llowing state tortactions based on allegedly bad faith bankruptcy fillings [sic] orviolation of the automatic stay to go forward ultimately wouldhave the effect of permitting state law standards to modify theincentive structure of the Bankruptcy Code and its remedialscheme") (citing Gonzales v. Parks, 830 F.2d 1033, 1036 (9thCir. 1987)); In re Tate, 253 B.R. 653, 671 (Bankr.W.D.N.C.2000) ("[T]he Plaintiffs' state claims are preempted in thisparticular context, because they stand as obstacles to theaccomplishment of the full purposes and objectives of federalbankruptcy law.").

23. While the analysis of this issue ends here, it isnonetheless also worth considering whether, in the event it weredetermined that there was an actual conflict of interest, itwould be equitable to deny RMF compensation when, as occurredhere, (i) RMF disclosed the nature of the conflict to the Trusteeand Cunningham prior to the Trustee's application for RMF'semployment, (ii) RMF's employment was approved by the bankruptcycourt under § 327, (iii) the nature of RMF's representation ofCunningham did not change after RMF's employment was approved,and (iv) RMF performed approximately 600 hours of work on behalfof the Trustee for which it cannot obtain compensation from anyother source. Had RMF (i) initially failed to disclose the natureof the conflict or (ii) subsequently failed to disclose a changein the nature of its representation of Cunningham that gave riseto a conflict after its employment was approved, denial ofcompensation would not raise equitable concerns. Yet, whilecourts have certainly expressed concern that denying compensationin full when a professional's employment was approved under § 327may be unjust or inequitable in certain circumstances, it issensible to conclude that denial of compensation is only unjustif reliance on the bankruptcy court's prior approval wasreasonable. See In re Federated Dept. Stores, Inc., 44 F.3d at1320 (relying on fairness and equity to grant limitedcompensation to professional whose employment was not valid under§ 327); Rome, 19 F.3d at 63 n. 7 (citing cases that support theprinciple that equities may warrant lesser sanction even whengeneral rule favoring total denial of compensation applies); seealso In re Engel, 124 F.3d at 582 ("However, I cannot join themajority because I believe the bankruptcy court improperly deniedHantman all compensation under 11 U.S.C. § 330(a) without anyconsideration of the extent to which Hantman reasonably reliedupon the initial determination under 11 U.S.C. § 327(e) that hisservices were indeed in the best interests of the estate.")(McKee, J., dissenting). Reliance in the face of an actualconflict is undoubtedly unreasonable. Accordingly, even if RMF'srepresentation of Cunningham gave rise to an actual conflict ofinterest, it would not be unjust or inequitable to denycompensation. Simply put, an attorney or other professionalperson that elects to represent both a trustee and a creditor ina bankruptcy action accepts the risk that a court will later findthat that dual representation gave rise to an actual conflict ofinterest such that the professional is not entitled tocompensation under § 330.

24. See also In re Smith, 305 F.3d 1078, 1086 (9th Cir.2002) ("Under [§ 330(a)(4)(A)], a bankruptcy court cannot awardfees if the services rendered were unnecessarily duplicative.");In re AOV Indus., Inc., 797 F.2d at 1008 ("The requested fees[under § 330] may be reduced or eliminated on a number ofgrounds, including a finding that the debtor was billed forunnecessary or duplicative services."); In re Delta Petroleum,Ltd., 193 B.R. 99, 108 (D.P.R. 1996) ("Thus, by negativeimplication, a bankruptcy judge may award compensation forservices that were: reasonably likely to benefit the estate,necessary to its administration, or not unnecessarilyduplicative."); In re Heck's Props., Inc., 151 B.R. 739, 751(S.D.W.V. 1992) (denying fees on law firm's application forcompensation under § 330 on the ground that $4,140 of charges bylaw firm partner were "duplicative and unnecessary"); In reYankee Seafood Corp., 53 B.R. 285, 286 (Bankr.D.R.I. 1985) ("Inthis case, we are compelled to point out that courts may notallow double compensation for the same services, where attorneysare acting jointly in the same capacity, and that it is thecourt's responsibility to refuse compensation for excessive,unnecessary, or duplicative hours.").

25. The initial application for compensation requested$209,834.47 for services provided and expenses incurred inrepresenting the Trustee and Cunningham between June 19, 2000,before RMF was retained by the Trustee, and September 26, 2002.The application indicated that RMF sought compensation forservices provided on nine distinct projects, including fiveprojects that the application makes clear RMF performed solelyfor Cunningham. The Amended Application for compensation,however, requested $127,472.03 for services provided and expensesincurred in representing the Trustee between January 1, 2001, thedate RMF's representation of the Trustee was approved, andSeptember 26, 2002. It indicated that RMF sought compensation forservices provided on only three distinct projects performed onbehalf of the Trustee.

26. Compare In re The Bennett Funding Group, Inc., 213 B.R. 234,245 (Bankr.N.D.N.Y. 1997) ("It is . . . an acceptedprinciple that generally no more than one attorney may bill fortime spent in intra-office conferences or meetings absent anadequate explanation."); In re Yankee Seafood Corp., 53 B.R. at288 (disallowing compensation in part on the ground that "[i]tappears, at least in hindsight, that there was little that oneattorney, much less two, needed to do or did do to protect orenhance the interests of creditors, and whatever litigation wasnecessary was handled exclusively by debtor's counsel, anyway").

27. Not raised by appellants is whether RMF may recovercompensation, in full or in part, for any hours spent preparingthe initial application for compensation. Nor does it appear fromthe Amended Application that RMF in fact sought recovery forthose hours. Although this issue need not be resolved here, itseems clear that RMF should be awarded compensation for hoursspent preparing the initial application's request forcompensation for legal services rendered to the Trustee, to theextent that this work did not have to be repeated for the AmendedApplication. See 11 U.S.C. § 330(a)(6) ("Any compensationawarded for the preparation of a fee application shall be basedon the level and skill reasonably required to prepare theapplication."); In re Computer Learning Centers, Inc., 285 B.R. 191,219 (Bankr.E.D.Va. 2002) (stating that a professional may becompensated for fees in connection with a fee application under11 U.S.C. § 330(a)(6), but that "[t]his does not mean that everyaspect of preparing a fee application is compensable") (citingIn re CF & I Fabricators of Utah, Inc., 131 B.R. 474, 483-88(Bankr.D.Utah 1991)); In re On Tour, LLC, 276 B.R. 407, 418(Bankr.D.Md. 2002) ("This Court has taken the majority positionset out in cases such as In re Nucorp Energy, Inc.,764 F.2d 655, 662 (9th Cir. 1985), that bankruptcy counsel should becompensated for preparing and defending fee applications.").

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