### IN THE UNI TED STAT ES COURT OFAPPEALS FOR THE FIF TH CIRCU IT

No. 11-30462

In the Matter of: AMERICAN INTERNATIONAL REFINERY, INCORPORATED; AMERICAN INTERNATIONAL PETROLEUM CORPORATION,
Debtors

------------------------ ------------------------ ------------------------ --------------------- ROBBYE R. WALDRON, Appellant

v. ADAMS & REESE, L.L.P., Appellee

Appeal from the United States District Court for the Western District of Louisiana

Before BENAVIDES, STEWART, and GRAVES, Circuit Judges. BENAVIDES, Circuit Judge: This case is an adversa ry p r o c eeding arising out of the Chapter 11 bankruptcy of American International Petroleum Company (“AIPC” ) and American International Refinery, Inc. (“AIRI”) (collectively the “debtor s ” ). Appellant Robbye R. Waldron, the Liquidating Trustee of the AIPC Liquidating Trust (the “Trustee”), filed suit against Appellee Adams & Reese, LLP (“A&R”), U n i te d S ta te s C o u rt o f A p p ea l s

F i ft h C i rc u i t 

### F I L E D March 29 , 20 12 Lyle W . Cayce Clerk Case: 11-30462 Document: 00511805140 Page: 1 Date Filed: 03/29/2012No. 11-30462

the former debtors’ counsel, seeking disgorgement of the attorney’s fees awarded during the bankruptcy. After a bench trial, the bankruptcy court ordered a sanction of $ 1 3 5 , 0 0 0 f

o r A&R’s failure to adequately disclose various connections it had to the debtors and creditors, but it found that A&R did not have a disqualifying adverse interest. The Trustee appeals, arguing that A&R was not disinterested and that all legal fees should have been disgorged. We AFFIRM.

I. FA C T UA L AN D P R O C E D U R A L BA C K G R O U N D At the time of its bankruptcy, AIPC was a public corporation, with various affiliates and subsidiaries, including: AIRI, wholly owned by AIPC; St. Mark’s R ef in ery , wholly - own e d b y AI P C ; Am e ric an I nt e rn atio n al P e trol e u m Ka z akh s t an (“AIPK”), also wholly-owned; and Caspian Gas Corporation (“CGC”), partially

owne d

. AI P C r efined, produced, and marketed oil and engaged in oil and gas

e x ploration in Kazakhstan. Through AIPK and CGC, one of AIPC’s princip a l assets was a gas c o n c e s sion in the Shagyrly-Shomyshty gas field, located in Kazakhstan, called License 1551. At the time of its bankruptcy, the debtors’ largest creditors were GCA Strategic Investment Fund L i mited (“GCA”) and Halifax Fund, L.P. (“Halifax”). I n January 2004, in a transaction that forms a basis for pa r t o f th e Appellant’s claims against A&R, AIPK sold eighty-five percent of its interest in License 1551 to Bridge Hydrocarbons, L L C (“ Bridge”), for approximately $5 million. A subs t a n t i a l p o r tion of this sum was used to pay back-wages and b e n e fits to AIPC’s officers. In connection with the Bridge transaction, GC A 1 executed a consent agreement with AIPC, in which it agreed to release a security interest it held in AIPK’s shares. On December 11, 2003, however, GCA sent a

A&R actedas a neutra l esc rowagen t fort he Brid ge trans act ion, although it did not 1
r e p r e s e n t eit her par ty and wa s event ually rep lace d by anot her law fir m. Soo n aft er com ple t i o n o f t h e Brid ge tra nsa cti on, A&R pr ovide d legal advic e to AIPC on the acc ount ing tre atm ent of the paym ents AIPC ha d mad e t o i ts of fic ers . 2 Case: 11-30462 Document: 00511805140 Page: 2 Date Filed: 03/29/2012No. 11-30462

letter to AIPC indicating that its release was subject to certain conditions. Even though t h e se conditions never occurred, the Bridge transaction was still completed, a n d i t is not clear if GCA effectively retained a security interest in AIPK’s shares. In exchange for re l e a sing its security interest, GCA was

s u p p o s e d to have received substitute collateral from AIPC in the form of an assignment of dividends payable from CGC to AIPK. The assignment was not executed prior to the closing of the Bridge transaction. During pre-bankruptcy petition negotiations between GCA and the debtors, A&R drafted the dividend assi gnment agreement (the “Dividend Assignment”) between AIPC and GCA. Although the Dividend Assignment was not executed until after the filing of the debtors’ bankruptcy p etition, it was backdated to the date of the Bridge transaction. A&R never disclosed its role in drafting the Dividend Assignment to the bankruptcy court. AIPC engaged A&R to assis t in its restructuring in early 2004. In this 2 role, A&R represented AIPC during the negotiations of an agreement with GCA (the “lock

- u p agreement.”). The lock-up agreement provided that GCA would vote in favor of the bankruptcy plan that the debtors intended to propose, so long

as GCA’ s c l a i m s were treated as set forth in the agreement. The lock-up agreement was never fully executed and the final bankrup tcy plan was not based on the lock-up agreement’s terms. In fall 2004, AIRI and AIPC filed for bankruptcy in the Western District

o f L ouisiana in the same proceeding. The debtors continued to retain A & R a s bankruptcy counsel, an appointment that w a s ap p rove d b y th e b ankrup tcy court. O n e of the transactions that the Trustee also claims created a disqualifying conflict involves AIPC’s payment of its bankruptcy retainer. Because AIPC did not have adequate cash to pay a retainer, AIPC management sought out a

Pr ior to its ban kr upt cy, AIPC hadbe en A&R’s c lientona variet y of m att ers . 2 3 Case: 11-30462 Document: 00511805140 Page: 3 Date Filed: 03/29/2012No. 11-30462

different source of funding. An a r r a n g ement was reached, with A&R’s knowledge, whereby GCA loaned St. Mark’s Refine ry

— a wholly-owned subsidiary of AIPC—$200,000 in exchange for a security interest in the sale of

some real estate. As part of t h e t r a n s a ction, GCA wired the retainer funds di r e c t l y to A&R, with a notation indicating they were paid on behalf of the d eb tors. A&R’s retention application to the bankruptcy court did not disclose th e source of its retainer. T h e b a nkruptcy action involved conflict over the treatment of GCA’s secured claims. The Equity Security Holders Committee (the “ E q u ity Committee”) objected to the vario u s bankruptcy plans filed by the debtors, largely on the ground t hat the plans treated GCA’s claims too favorably. Ultimatel y , in March 2006, the Equity Committee and GCA reached a settlement. The settlement was confirmed by the b ankruptcy court and it provided for full payment of all secured and unsecured claims and a distribution to equity holders. A&R was awarded $6 7 8 , 9 3 6

. 2 5 in fees and $63,100.67 in 3 costs. A&R did not, however, disclose GCA’s payment of the initial retention fee to the court in its three separate applications for compensation. The current adversary proceeding was filed in September 200 6 b y the Trustee. In December 2006, after A&R disclosed that GCA paid its initial

4 retainer fee, the Trustee filed a n amended complaint adding claims for disgorgement and p u n i t ive damages for willful misconduct. The bankruptcy 5 court granted a motion for partial summary judgment, and it di s m i s s ed the

AIPC and A&R had no involvem ent in the negot iati on or ter ms of the fina l se ttl em ent. 3
At the t im e of thefiling of the curr ent advers ary pro cee ding, the Trus teewas Jason 4 Sear cy. S earc y w as late r rep lace d by Rob bye Waldr on, the curr ent liqu idat ing Trust ee. We sim ply ref

er to both individual s as the Trus tee and do not di st inguis h betw een them unles s it is rele vant to the analys is.

The com plai nt origi nally as s e r t e d clai ms for fr audul ent and pr efe rent ial tra nsf er 5 clai ms unde r 11 U. S. C. §§ 547, 548, and 550 agains t A&R, se ek ing avoid ance and dam ages
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T rustee’s claims for willful misconduct. The Trustee later filed a s e c o n d amended complaint, limiting the action to one for disgorgement. Subsequently, the Trustee filed a motion for leave to file a third amended complaint, seeking to add claims for fraud, fraudulent inducement, conspiracy, and breach of duty against A&R. T h e c laims centered on A&R’s decision not to dispute GCA’s secured claim s . The bankruptcy court denied in part and granted in part the motion, allowing the breach of duty claim, but not the fraud-based claims. The bankruptcy court later granted a motion for partial summary judgment, dismissing the breach of duty clai m . Thus, only the disgorgement claim remained pending for trial. The bankruptcy court held a three-day b e nch trial and issued a memorandum ruling and judgment, finding: (1) that A&R di d n o t have a di s q u alifying adverse interest; (2) that A&R, nonetheless, failed to ma k e adequate disclosures of its connections to the debtors and to GCA; and (3) that

a disgorgement of $135,000 was a proper sanction for the disclosure violations. The bankruptcy court denied all other relief. O n appeal to this Court, the 6 Trustee argues that the bankruptcy court’s decision should be reversed because A&R was not disinterested, that all fees must therefore be disgorged, and that the bankruptcy court also abused its discretion by denying the motion to file a third amended complaint. II. S TAN D A R D O F R E VI EW “This court reviews the decision of a district court, sitting as an appellate court, by applying the same standar d s of review to the bankruptcy court’s findings of fact and concl u s i o n s o f l a w as applied by the district court.” In re Scopac , 624 F.3d 274, 279–80 (5th Cir. 2010) (c i t i n g In re Morrison , 555 F.3d 473, 480 ( 5 t h C i r . 2 0 09)). The factual findings of the bankruptcy court are

O n ap pea l, the dis tri ct court uphe ld the bank rup tcy cour t’s d ecis ion in its en tir ety. 6 5 Case: 11-30462 Document: 00511805140 Page: 5 Date Filed: 03/29/2012No. 11-30462

r e vi e w ed for clear error and its conclusions of law are reviewed de novo. Id. “[The court’s] finding of fact may be reversed only if the reviewing court has the definite and firm conviction that a mistake has been made.” Id. ( qu o t ation marks omitted). A bankruptcy court’s decision to disgorge fees or impose a sanction is reviewed for abuse of discretion. In re West Delta Oil Co. , 432 F.3d 347, 358 (5th Cir. 2005); In re Prudhomme , 43 F.3d 1000, 1003–04 (5th Cir. 1995). A denial of a motion f o r l eave to amend is also reviewed for abuse of discretion. Gentilello v. Rege , 627 F.3d 540, 546 (5th Cir. 201 0). III. ANA L Y S I S A. Disqualifying Conflict of Interest On appeal, the Trustee’s central argument is tha t t h e b ankruptcy court erred in finding that A&R did not have a disqualifying interest. Specifically, the Trustee argues that A&R was not disinterested: (1) bec a use GCA paid the bankruptcy retainer; (2) because of A&R’s relationship with GCA; and (3) because A&R advised AIPC on h o w t o c haracterize payments made to officers and directors several months prior to filing the bankruptcy petition. The Bankruptcy Code requires that a professional retained by the debtor in possession not “hold or represent an interest adverse to the estate,” and that the professional be “disinterested.” 11 U.S.C. § 327(a); In re W.F. Dev. Corp. , 905 F.2d 883, 884 (5th Cir. 1990). The term “disinterested” is defined in 11 U.S.C. § 101(14) as a person (1) who “is not a creditor, an equity security holder, or an insider, ”(2) who “is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor,” and (3) who “does not have an intere s t m a t e r i ally adverse to the interest of the estate or of any

c l ass of creditors or equity security holders, by reason of any direct or i n di r e c t relationsh i p t o , connection with, or interest in, the debtor, or for any other reason.” 11 U.S.C. § 101(14); W.F. Dev. Corp. , 905 F.3d at 884. A party has an

“ a dv e rse interest” to the estate if they: “(1) [ ] possess or assert any economic

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interest that wou l d tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) [ ] possess a predisposition under circumstances that re n d e r s uch

a bias against the estate.” West Delta Oil , 432 F.3d at 35 6 ( q u otation marks omitted); see also In re AroChem Corp. , 176 F.3d 610, 623 (2d Cir. 1999) (same); In re Crivello , 134 F.3d 831, 835 (7th Cir. 1998) (same). The determination of 7

an adverse interest must be made “with an eye to the specific facts of each case.” West Delta Oil , 432 F.3d at 356. The standards for finding a conflict are “‘strict’” and “attorneys engaged in the conduct of a bankruptcy case ‘should be free of the slightest personal interest which might b e r ef lected in their decisions concerning

m a t t e r s of the debtor’s estate or which might impair the high degree of impa r t i a l ity and detached judgment expected of them during the course of administration.’” West Delta Oil , 432 F.3d at 355 (quoting In re Consol. Bancshares, Inc. , 785 F.2d 1249, 1256 & n.6 (5th Cir. 1986)). Under Section 328(c), “[ a] court may deny compensation for services
pro vi d e d by an attorney who holds such an adverse interest.” West Delta Oil , 432 F.3d at 354–55; 11 U

. S

. C. § 328(c). A bankruptcy court is not required, however, to deny all compensation if an attorney has an adverse interest and is found to not be disinterested. West Delta Oil , 432 F.3d at 355 n.22 (explaining that the rule is flexible because a bankruptcy court is one of equity); In re Prince , 40 F.3d 356, 359–60 (11th Cir. 1994) (same); Gray v. English , 30 F.3d 1319, 1324 (10th Cir. 1994) (same). As noted, the Trustee a r gu es that A&R was not disinterested based on three different grounds. Two of these grounds focus on A&R’s connections to

The “advers e inte res t” ter m in Sec tion 327( a) is genera lly cons ide red to have the sam e 7
me aning as the “advers e inte res t” ter m in Sec tio n 101( 14). See, e. g. , Wes t De lta Oi l , 432 F.3d at 356 (s tat ing the phr ase s as having the sam e me aning) ; In re Wor ldCom , Inc. , 311 B.R. 151, 164 (Bank r. S. D. N. Y. 2004) (s tat ing the tw o def init ions for m a “s ingle tes t to judge conf lict s” ). 7 Case: 11-30462 Document: 00511805140 Page: 7 Date Filed: 03/29/2012No. 11-30462

GCA and we will consider them together. The most t r o ub ling aspect of A&R’s relationship to GCA is obviously GCA’s p ay m e nt of the bankruptcy retainer. Courts have taken two approaches when deciding if payment of a bankruptcy retainer by a third-party is a dis q u a l i f ying interest. Some courts have found that payment of a retainer by a third party is a per se disqualification, while other courts have held that the totality of the circumstance s s u r r o u nding the retainer payment must be scrutinized before deciding if a disqualifying conflict exists. See In re Lotus Props. LP, 200 B.R. 388, 391–96 (Bankr. C.D. Cal. 1996) (explaining both approaches). Although we have not formally adopted a test in this Circuit, we find that the per se approach is inconsistent with our decision in West Delta Oil

. In that decision, we stated that the existence of a conflict should be determined “with an eye to the specific facts of each case.” West Delta Oil , 432 F.3d at 356; see also In re Harold & Williams Dev. Co. , 977 F.2d 906, 909–10 (4th Cir. 1992) (stating that judicially created per se rules for disq u a l i f ications are usually not

a p p ropriate). Thus, we now adopt the totality of the circumstances approac h

8 for deciding whether third-party payment of a retainer creates a disqualifying interest. 9

See also In re Rabex Am uru of N. C., Inc. , 198 B.R. 892, 895–96 (Bank r . M

. D

. N. C. 8 1996) (s tat ing that per se rule regar ding ret ainer paym ent conf lict s wi th noti on that an adver sein ter es t is sup pos ed to be a c ase -s pec ifi c det erm inati on)

.

See In re767 7 E. Be rryA ve . As soc s. , L.P. , 419 B.R. 833, 844( Bank r. D

. Colo. 200 9) 9 (ad opt ing tot alit y tes t and char act erizi ng it as the majo rit y app roac h); Lotus Prop s. , 200 B.R. at 392–95 (adop ting tot alit y app roac h); In re Mo. Mi ning, Inc. , 186 B.R. 946, 948–50 (Bankr

. W.D

. Mo

. 1995) (s ame); In re Kel ton , 109 B.R. 641, 644–58 (Bank r. D. Vt. 1989) (s ame). Som e of the cas es app lying the tot alit y app roac h se t for th sp ecif ic mul ti- fac tor tes ts to be use d wh en judging if the ret ainer paym ent ris es to the level of a dis qualif ying inte res t. See, e. g. , Kel ton , 109 B.R. at 658 (s tat ing mul ti- fac tor tes t) ; Mi sso uri Mi ning , 186 B.R. at 949 (s ame) (c itin g In re Olson , 36 B.R. 74, 76 (D

. Neb. 1983) ). We dec line to ado pt a par tic ular tes t, and ins tead , m o r e genera lly ins tru ct, cons ist ent wi th Wes t De lta Oi l , that all of the cir cum st ance s o f t h e rep res enta tio n m ustbec ons ide red

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The Trustee cites a number of actions taken by A&R that it argues shows that A&R felt loyalty to GCA due to the retainer. We will analyze each of these

occurrences. First, the Trustee argues that A&R’s rol e i n n e gotiating the prepetition lock-up agreement shows A&R’s loyalty to GCA. It is undisputed that A&R acted as the debtors’ counsel during the pre-petition negotiations with GCA. It is not clear, however, how A&R’s role in this negotiation evidences any divided loyalties. It is common for a law firm to help its client negotiate a prepetition agreement with a creditor and the bankruptcy process encourages such voluntary settlements. The Trustee also argues that A& R b elieved that it was bound by the retainer payment to favor GCA’s claims. Loyalty to a third-party due to the payment of a retainer would obviously render a party not disinterested. See In

re B i g R i vers Elec. Corp. , 355 F.3d 415, 434 (6th Cir. 2004) (stating that a professional would not be disinterested if p a y m e n t b y creditor was linked to providing favorable result to that creditor). There is some evidence in the record showing that A&R discussed submitting bankruptcy plans that were favorable t o GCA. However, the evidence supporting the Trustee’s contentions on this poi n t c a n also be interpreted as simply showing that A&R was aware that confirmation of a plan would require GCA’s support, and that the proposed plan must, therefore, be acceptable to GCA. The bankruptcy c o u rt found that the record more fairly supported this legitimate inference. We are in a poor position to second-guess that factual judgment, and we now hold that this factual finding is not clear error. United States v. Casteneda , 951 F.2d 44, 47 (5 t h C i r . 1992) (stati n g t hat where “two permissible views of the evidence are presented, the district court’s choice between them cannot be clearly erroneous.”). Third, the Trustee argues that A&R’s divided loyalties are evidenced by its decision not to litigate GCA’s secured claim. GCA’s secured claim was based

on its lien on AIPK’s shares and on the assignment of CGC dividends from AIPK.

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Although there a r e gr o unds for questioning A&R’s decision on this point, the testimony at trial indicated that A&R considered whether to dispute these claims and decided that the costs of litigation were not in the best inter e sts of the estate, particularly given that the debtors were already litigating Halifax’s claims. In its analysis, the bankruptcy court considered the same arguments as

are currently presented on appeal, and it found that there was no evidence that A&R’s decision was affected by loyalty to GCA. Again, this factual finding is supported by evidence i n t he record and it is, therefore, not clearly erroneous. See Fairley v. Hattiesburg, Miss. , 584 F.3d 660, 6 7 3 ( 5 t h Cir. 2009) (“‘If the district court’s account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not r e v erse . . .’” (quoting Anderson v. City of Bessemer , 470 U.S. 564, 573 (1985)). Finally, and most suspiciously, the Trustee offers evidence showing that A&R drafted a motion for relief f r o m s t ay on behalf of GCA during the bankruptcy. The bankrup t c y c o u rt found, however, that this letter did not evidence any favoritism or loyalty to GCA. Instead, t h e bankruptcy court credited testimony from Dean Ferguson, who was A&R’s lead attorney on the bankruptcy, that A&R prepared the draft as part of a strategy to help overcome

a stalemate in negotiations between G C A a nd the Equity Committee. Even though the circumstances surrounding the drafting of this motion are strange,

we again hold that the bankruptcy court’s factual findings on this issue are not clearly erroneous. Ferguson’s explanation for the drafting is reasonable, and the bankruptcy court di d not err in crediting his testimony on this point. See Fairley , 584 F.3d at 673. Thus, we find that this evidence does not s h o w that A&R’s loyalty to the debtors was compromised. Overall, given the factual findings made b e l o w , we agree with the bankruptcy court that GCA’s payment of the retainer did not create an adverse interest or show that A&R was not disinterested. The facts of this case are not

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nearly as egregious as those in W e s t Delta Oil , where we found that special counsel for the debtor had an adverse inte r e s t because they were actively plotting to har m t he estate for their own benefit. 432 F.3d at 357–58. In that
case, the attorneys for the debtor attempted to surreptitiously p u r c hase the debtor though an outsid e i nv e s tor, while also suppressing other bids to artificially depress the purchase price. Id. at 349–53. We held that disgorgement of all fees was required due to the profound nature of the conflict. Id. at 358. While some of the actions of A&R appear suspicious, this case does not present a totality of the circumstances as egregious as West Delta Oil , and

we agree with the bankruptcy c o u r t t h a t the relationship between GCA and A&R does n o t r i s e to the level of a disqualifying conflict requiring the disgorgement of fees. See AroChem , 176 F.3d at 628 (stating that a bankruptcy court’s conclusions on a conflict of interest should be accorded deference); In re Martin , 817 F.2d 175, 182 (1st Cir. 1987) (same). Here, unlike in that case, there is no evidence that A&R took action contrary to t h e i n t e r e s ts of the estate or gave legal advice that was colored by loyalty to a third party. Accordingly, we decline to reverse the bankruptcy court’s ruling on this issue. In addition to A&R’s relationship to GCA, the Trustee separately argues that A&R possessed a disqualifying interest b e c ause of its previous representations of the debtors. Specifically, the Trustee argues that A&R’s role in the Bridge transaction prevented it from offering objective legal advice to the debtors. The bankruptcy court found that A&R did not have a conflict because A&R’s role in these transactions was limited to a neutral escrow agent. I n J anu ary 2 0 0 4 , AI P K transferred eighty-five percent of its shares of C G C to Bridge in exchange for $5 million. A significant portion of the sale price was used to pay the wages and benefits of AIPC’s officers. The bankruptcy c o u rt’s determination that A&R’s role was limited to a neutral escrow agent is incorrect based on the test i mony at trial. Rather, the testimony showed that A&R, in

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addition to acting as an escrow agent, also advis e d AI P C on the accounting treatment of these payments, and counseled AIPC that the payments should be labeled “retention payments for fut u r e s ervices.” Given this factual error, we must now, therefore, determine whether A&R’s legal advice on these payments created a disqualifying conflict. Although under Section 1107(b) of the bankruptcy code, a professional “is not disqualified for employment under section 327 o f th i s title by a debtor in possession solely because of such person’s e m p loyment by or representation of the debtor before the commencement of the case,” 11 U.S.C. § 1107(b), courts have held that the nature of the representation can still create a disqualifying conflict under Section 327(a), such as where the a t t o r n e y may be required to

r e vi e w h i s own legal work in the course of the bankruptcy action. See, e.g. , I n

re Ressler Hardwoods & Flooring, Inc. , 2010 WL 2342497, at *6–7 (Bankr. M.D. Pa. June 8, 2010); In re Granite Sheet Metal Works, Inc. , 159 B.R. 840, 841–49 (Bankr. S.D. Ill. 1993). We agree with these cases that earlier legal w ork can require disqualification of counsel under certain circumstances. See West Delta Oil , 432 F.3d at 355 (stating that an attorney should be free from the “slightest personal interest which might be reflected in their decisions concerning matters of the debtor’s estate or which might impair the high degree of impartiality and detached judgment expected of them . . . .” (quotation marks omitted)). Al th o ugh recognizing such conflict is possible, we do not think that the record supports finding one here. As noted by the Trustee, the wages and benefits paid to AIPC’s officers and directors may have been avoidable because they were paid close in time to the bankruptcy filing. Nonetheless, the Trustee points to no evidence in the record indicating that A&R’s advice on the treatment of these cl a i m s w a s clouded. Instead, the record shows that A&R counseled against disputing these claims because, in its judgment, the potential benefit to the e s t ate was outweighed by the expense of litigating the claims. Although

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obviously not ideal or best practice, A&R’s previous relationship to the debtors is also insufficient to constitute a disqualifying interest. B. Sanction for Failure to Make Adequate Disclosures The Trustee also challenges the bankruptcy court’s ruling that $135,000

was an appropriate sanction for A&R’s violation of Bankruptcy Rule of Procedure 2014(a). After finding that there was not a disqualifying conflict, the bankrup tcy c o urt found that A&R had failed to make adequate disclosures under Bankruptcy Rule 2014(a) of the so u r c e o f its retainer and of its previous relationship with the debtors. The bankruptcy court found, however, that none of these disclosure errors were intentional and that no harm or prejudice to the estate or credito r s r e s u lted. The court ordered a sanction of $135,000, or approximately twenty percent of the total fees awarded to A&R. On appeal, 1 0 the Trustee argues that all compensation should have been disgorged. “Federal Rule of Bankruptcy Procedure 2014(a) requires any professional applying for employment to set forth ‘to the best of the applicant’s knowledge’ all known connections of the ap p licant with the ‘debtor, creditors, or any other party in interest, their respective attorne ys and accountants, the United States trustee, or any person employed in the office of the United States trustee.’” West Delta Oil , 432 F.3d at 355 ( quoting Fed. R. Bankr. P

. 2 0 1 4(a)). The disclosure requirements of Rule 2014(a) are broader than t h e rules governing disqualification, and an applica n t m ust disclose all connections regardless of whether they are sufficient to rise to the level of a disqualifying interest under Section 327(a). See In re Cor n e rs t o ne Prods., Inc. , 416 B.R. 591, 608 (Bankr. E.D. Tex. 20 0 8) (stating that “all” connections must be disclosed); In re Leslie Fay Cos., 175 B.R. 525, 533 (Bankr. S.D.N.Y. 1 994) (same).

Thed ist ric t cour t als o f oundnoer rorint his r uling. 1 0 13 Case: 11-30462 Document: 00511805140 Page: 13 Date Filed: 03/29/2012No. 11-30462

Courts may deny all compensation to professionals who f a i l t o make adequate disclosure, and “counsel who fail to disclose t i m e l y a nd completely their connections proceed at their own risk because failure to dis c l o s e is sufficient grou n d s to revoke an employment order and deny compensation.” West Delta Oil , 432 F.3d at 355 (quotation marks omitted) ; see also Rome v. Braunstein , 19 F.3d 54, 59–60 (1st Cir. 1994) (“Absent the spontaneous, timely and complete disclosu r e required by section 327(a) and [Rule] 2014(a),

c o u r t

- appointed counsel proceed at their own risk .”). In determining an appropria t e s a n ction, an important consideration is whether the failure was intentional. Crivello , 134 F.3d at 839 (stating that “a bankruptcy court should punish a willful failure to disclose the connections

. . . as severely as an attempt to put forth a fraud on the court.”). We review a bankruptcy court’s decision to impose sanctions for abuse of discretion. West Delta Oil , 432 F.3d at 358. The Trustee argues on appeal that the bankruptcy court erred in finding that the disclosure errors were unintentional, arguing th at th e f ailure must have been intentional because of the number of times that A&R failed to disclose its relationships to the debtors and GCA. The T ru s t e e is correct that A&R had many opportunities to make full disclosure. Nonetheless, evidence in the record

s hows that attorneys at A&R believed full disclosure had been made in th e i r employment application, and that the initial disclosure failure was the result of negligence. The testimony at trial indicates the items that were disclosed were compiled by an associate with little or no bankruptcy experience, that they were then listed in the application wi t h out verification by Dean Ferguson, and that the application was signed and filed by another attorney with no a d di t i o nal review. Additionally, later email correspondence between Dean Ferguson and another attorney also supports the conclusion that the disclosure err o r s w e r e inadvertent.

14 Case: 11-30462 Document: 00511805140 Page: 14 Date Filed: 03/29/2012No. 11-30462

Given that the bankruptcy court’s factual findings are reasonable based

on the record, we conclude that bankruptcy court did not commit clear error. See United States v. Trujillo , 502 F.3d 353, 356 (5th Cir. 2007) (factual findings are not clear error i f t h e y a r e “plausible in light of the record as a whole”). Accordingly, we hold that the bankruptcy c ourt was acting well within its discretion in ordering disgorgement of only a portion of the retainer. See West Delta Oil , 432 F.3d at 355 n.22 (stating that review of sanctions is for abuse of discretion); In re Cook , 223 B.R. 782, 794 (B.A.P. 10th Cir. 19 98) (same). C. Denial of Leave to Amend Fin ally , the Trustee argues that the bankruptcy court ab u s e d it s di s cr e tio n when it denied in part his motion for leave to file a third amended complaint. 1 1 In the motion to file a third amended complaint, the Trustee sought to add much broader claims for fraud, fraudulent in duc e m e nt, conspiracy, and breach of duty. The Trustee claimed th a t he discovered three new documents that were previously unavailable. Th e b ankruptcy court denied in part and granted in part the motion, allowing the breach of duty claim, but not the fraud-based claims. We review a decision to deny leave to amend under Federal Rule of Civil Procedure 15(a) for abuse of discretion. Gentilello , 627 F.3d at 546; Fed. R. Civ. P. 15(a). When considering whether to a l l ow amendment, a court should consider factor s such as “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to c ure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility of amendment.” In re Southmark , 88 F.3d 311, 315 (5th Cir. 1996). We hold that the bankruptcy court’s decision to deny the amendment was not an abuse of discretion. The Tru stee’s unexplained delay in bringing these claims weighs in favor of finding that the denial of amendment was proper. See

By this t im e, Robbye Wald ron had rep lace d Jas on Sear cy a s Trus tee

. 1 1 15 Case: 11-30462 Document: 00511805140 Page: 15 Date Filed: 03/29/2012No. 11-30462

Ro s e nz weig v. Azurix Corp. , 332 F.3d 854, 865 (5th Cir. 2003) (stating that a “litigant’s failure to assert a claim as soon as he could have is properly a factor to be considered in deciding whether to grant leave to amend,” although noting the litigant should not be “punished” for not presenting a claim as “promptly as possible” (quotation marks and citation omitted)). The “newly” discovered documents in this case had actually been available to th e Ap p ellants for a signi f icant amount of time. Other than noting that the current Trustee was 1 2 appointed somewhat recently, and pointing to the complexity and length of the record, the Appellant offers little explanation for waiting to assert these claims. Similarly, the newly added fraud claims would have dramatically altered the s ubj ect matter of the suit at a late juncture. A court is often justified in denying a motion for leave to ame n d w h e n i t would “fundamentally alter the nature of th e c a s e . ” Mayeaux v. La. Health Serv. & Indem. Co. , 376 F.3d 420, 427 (5th Cir. 2004). As it stood, this suit was a fairly limited action to determine whether A&R possessed a disqualifying conflict of interest, and potentially, the amount of disgorgement. The fraud claims would not have been factually similar to the disgorgement claim and they likely would have r e quir ed expansive discovery and litigation, thereby delaying resolution of the case. Accordingly, we hold that the bankruptcy court did not abuse its discretion in denying in part the motion for leave to file a third amended complaint. See Loza n o v. Ocwen Fed. Bank, F S B , 4 8 9 F.3d 636, 644 (5th Cir. 2007) (affirming denial of motion to amend where plaintiff was not diligent in asserting claim for fraud and had failed to take advantage of earlier opportunities to amend); Smith v. EMC Corp. ,

The fir st tw o doc ume nts —c opi es of the cons ent agree me nt betw een GCA and AIPC, 1 2
a n d the Dividen d Ass ignme nt—we re act ually availabl e thr oughout the enti re adver sar y pr oce edi ng and we re als o kn ow n to the Equity Com mi tte e dur ing the unde rlying bank rup tcy act ion. The thir d doc ume nt— an em ail fr om De an Fergus on t o o t h e r law yers at A&R—w as adm itt ed over a year earl ier , a n d it had been sub mi tte d to the cour t by the Trus tee in opp os i t i o n to App elle e’s mo tio n for par tial sum mar y judgm ent. Thus, the ground s for this clai m we re act ually kn ow n t o t he App ellantf or at leas t a yea r, andli ke ly f or muc h l onger. 16 Case: 11-30462 Document: 00511805140 Page: 16 Date Filed: 03/29/2012No. 11-30462

393 F.3d 590, 5 9 5 ( 5 t h Cir. 2004) (citing “undue delay” as a factor weighing against allowing amendment); Southmark , 88 F.3d at 315–16 (affirming denial of motion to amend where plaintiff sought to add claim that it had knowledge of for almost a year and stating that “[l]iberality in pleading does not bestow on a litigant the privilege of neglecting her case for a long period of time”). 1 3 IV. C O N C L U S I O N For the foregoing reasons, the judgme n t o f t he district court is AFFIRMED.

The bank r u p t cy court als o fou nd that the ame ndm ent wa s fut ile. Becaus e we can 1 3 aff irm the denial on othe r ground s, we need not decid e wh ethe r the prop os ed third amend ed com plai nt wo uld have ade quate ly st ated a clai m for fr aud. See Strip li ng v. Jorda n Prod. Co., LLC, 234 F.3d 863, 873 (5t h Cir. 2000) (s tat ing that an ame ndm ent is fut ile wh en it wo uld fail to st ate a c laim ). 17 Case: 11-30462 Document: 00511805140 Page: 17 Date Filed: 03/29/2012