Bankruptcy Court Slams U.S. Trustee's Attempted Disqualification Of Investment Banker

• Published date: 24 October 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Financial Services, Insolvency/Bankruptcy
• Law Firm: Schulte Roth & Zabel
• Author: Mr Michael L Cook

The "connections" of the chairman ("W") of the debtor's investment bank ("S") to his family's foundations do "not give rise to an actual, active conflict of any kind," held a bankruptcy judge in the Southern District of New York on Oct. 17, 2022. In re SAS A.B., 2022 WL 10189110, *3 (Bankr. S.D.N.Y. Oct. 17, 2022). According to the court, it "is only through strained speculation [by the U.S. Trustee] that a potential issue can even be posited." Accord, In re Harold & Williams Dev. Co., 977 F.2d 906 (4^th Cir. 1992) (rejected UST and bankruptcy court's per se prohibition of professional's serving as attorney and accountant; "horrible imaginings alone cannot be allowed to carry the day;" remanded for fact-specific inquiry whether foreseeable tasks presented inherent conflict or potential breach of confidence), quoting In re Martin, 817 F.2d 175, 183 (1^st Cir. 1987) (same; "Not every conceivable conflict must result in" disqualification).

Courts routinely rely upon "ethical walls", said the court, when "large investment banking firms have affiliates or divisions that engage in debt trading, stock trading, or other activities that arguably might give rise to potential issues if a person engaged in those activities were permitted to communicate with the investment bankers." Because the U.S. Trustee ("UST") had "endorsed the use of ethical walls... in a countless number of [other cases]," the court saw "no reason why such arrangements would not be sufficient to protect against any risks that one might posit with respect to [W's] association with" his family foundations. Id., at *3. The court then approved S's wall in the case.

Relevance

Every professional seeking retention in a bankruptcy case must file a "verified statement... setting forth 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." Fed. R. Bankr. P. 2014(a). The professional's retention under Bankruptcy Code ("Code") ' 327(a) thus requires disclosure of any information bearing on the court's consideration of ' 327(a)'s two-prong test (disinterestedness and no adverse interest). The professional's disclosure must be "spontaneous, timely and complete." Rome v. Braunstein, 19 F.3d 54, 59 (1^st Cir. 1994). Failure to disclose relevant information is itself ground for reduction of fees or removal from the case. In re Textile Indus., Inc., 198...