A recent decision by the U.S. District Court for the Northern District of California emphasizes the importance of candor in retention applications filed in bankruptcy cases. In Kun v. Mansdorf ( In re Woodcraft Studios ), 464 B.R. 1 (N.D. Cal. 2011), the court upheld a bankruptcy court’s decision denying all fees requested by a debtor’s attorney and ordering disgorgement of a $5,000 retainer where the attorney had failed to disclose his pre-petition relationship with the debtor and the circumstances surrounding his receipt and use of the retainer.
Woodcraft Studios Inc. filed a petition for relief under Chapter 11 of the Bankruptcy Code on Dec. 22, 2010, according to the opinion. Shortly thereafter, on Jan. 13, 2011, Woodcraft applied to the bankruptcy court for approval of its retention of attorney Albert Kun as general counsel to the debtor-in-possession. The retention application stated that Kun had “‘never represented Woodcraft Studios Inc. before,’” that Kun “‘represents no interest adverse to debtor as debtor in possession’” and that Kun had “‘no connection to any party in interest,’” according to the opinion. The affidavit accompanying the application included the contract between Kun and Woodcraft, which provided for an hourly fee of $250 and a “nonrefundable retainer” in an amount of $5,000. The contract was dated Dec. 29, 2010, seven days after the petition date. The bankruptcy court entered an order approving Kun’s retention.
