Opinion ID: 626316
Heading Depth: 2
Heading Rank: 2

Heading: Sanction for Failure to Make Adequate Disclosures

Text: 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 bankruptcy court found that A&R had failed to make adequate disclosures under Bankruptcy Rule 2014(a) of the source of 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 creditors resulted. The court ordered a sanction of $135,000, or approximately twenty percent of the total fees awarded to A&R. [10] On appeal, 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 applicant with the `debtor, creditors, or 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.' West Delta Oil, 432 F.3d at 355 (quoting Fed. R. Bankr.P. 2014(a)). The disclosure requirements of Rule 2014(a) are broader than the rules governing disqualification, and an applicant must 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 Cornerstone Prods., Inc., 416 B.R. 591, 608 (Bankr. E.D.Tex.2008) (stating that all connections must be disclosed); In re Leslie Fay Cos., 175 B.R. 525, 533 (Bankr.S.D.N.Y. 1994) (same). Courts may deny all compensation to professionals who fail to make adequate disclosure, and counsel who fail to disclose timely and completely their connections proceed at their own risk because failure to disclose is sufficient grounds 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 disclosure required by section 327(a) and [Rule] 2014(a), court-appointed counsel proceed at their own risk. ). In determining an appropriate sanction, 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 that the failure must have been intentional because of the number of times that A&R failed to disclose its relationships to the debtors and GCA. The Trustee is correct that A&R had many opportunities to make full disclosure. Nonetheless, evidence in the record shows that attorneys at A&R believed full disclosure had been made in their 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 without verification by Dean Ferguson, and that the application was signed and filed by another attorney with no additional review. Additionally, later email correspondence between Dean Ferguson and another attorney also supports the conclusion that the disclosure errors were inadvertent. 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 if they are plausible in light of the record as a whole). Accordingly, we hold that the bankruptcy court 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 (10th Cir. BAP 1998) (same).