Retainer from Third Party No Automatic Disqualification – Fifth Circuit Opinion

Retainer from Third Party no Automatic Disqualification -business bankruptcy lawyerThe U.S. Court of Appeals in New Orleans issued an opinion in March 2012 taking sides with courts that don’t find an automatic disqualification when a bankrupt company’s lawyer receives a retainer provided by a third party.

The opinion by Circuit Judge Fortunato P. Benavides said that whether a bankrupt’s lawyer is disqualified for receiving a retainer provided by a third party is to be decided by a “totality of the circumstances” test.

The case involved lawyers for a company that went through Chapter 11 successfully. The firm was paid $679,000 in fees.

After the case was over, the trustee for a creditors’ trust discovered that the law firm had received a $200,000 retainer not disclosed to the bankruptcy court. To make matters worse, the $200,000 came from the primary secured lender, which lent the retainer to the company just before bankruptcy.

The bankruptcy judge ruled that a sanction of $135,000 was sufficient, turning down the trustee’s demand that all fees be disgorged. The sanction imposed by the bankruptcy court amounted to 20 percent of the fees.

Benavides concluded that the bankruptcy judge hadn’t abused his discretion, given a finding that the law firm took no action contrary to the interests of the bankrupt company.

The bankruptcy judge found that the failure to disclose the retainer was the result of having the initial retention application prepared by an inexperienced associate. Thereafter, everyone in the firm assumed disclosure had been made about the retainer.

The case is Waldron v. Adams & Reese LLP (In re American International Refinery Inc.), 11-30462, U.S. 5th Circuit Court of Appeals (New Orleans).