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Click here for the full text of this decision FACTS:The court reviews an award of attorney’s fees to special counsel in a bankruptcy proceeding who allegedly acted to acquire the assets of the debtor to the debtor’s detriment. In awarding fees, the bankruptcy court, upheld by the district court, found no conflict of interest. West Delta retained Michael Fenasci and Perrin Butler as special counsel to, among other things, deal with a motion to dismiss West Delta’s bankruptcy petition. In an order accepting Fenasci and Butler’s fee applications, the bankruptcy court recounted that: “[a]t one time, Burrwood Oil company was negotiating to provide collateral to secure a loan to West Delta [the debtor]. Mr. Fenasci and Mr. Butler agreed, at some time that cannot be fixed with any degree of accuracy, to participate as passive investors with other investors in Burrwood Oil. If called upon to save the debtor from ceasing operations as a result of a failure to file a plan, Burrwood Oil would have posted collateral so that Crescent Oil could obtain a line of credit of $960,000 to fund the debtor’s plan of reorganization as described in the debtor’s disclosure statement. These negotiations, however, never came to fruition. Both Mr. Fenasci and Mr. Butler testified unequivocally that no agreement ever existed between them and Burrwood Oil, that they never signed anything, never pledged any collateral at the bank, and never acquired an interest in Crescent Oil. The disclosure statement probably should have disclosed the possible participation of Mr. Fenasci and Mr. Butler, and it certainly would have had to have been disclosed at any confirmation hearing on the debtor’s plan of reorganization.” The court concluded that this failure to disclose could be excused. HOLDING:Reversed. 11 U.S.C. �327(e) provides for the employment of counsel by a bankruptcy trustee for “a specified special purpose.” Counsel employed under this subsection must “not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.” A court may deny compensation for services provided by an attorney who holds such an adverse interest. The court examines whether, given Butler and Fenasci’s involvement with Burrwood, they were “disinterested” in the bankruptcy proceedings or had an interest “adverse” to the bankruptcy estate. The Bankruptcy Code does not define the phrase “represent or hold any interest adverse to the debtor or to the estate.” In In Re: Roberts, 46 B.R. 815 (Bankr. D. Utah 1985), aff’d in relevant part and rev’d and remanded in part on other grounds, 75 B.R. 402 (D. Utah 1987), the U.S. Bankruptcy Court for the District of Utah determined that the nearly identical phrase in �327(a) meant: 1. to possess or assert any economic interest that would 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. to possess a predisposition under circumstances that render such a bias against the estate. This definition has been employed by at least two circuit courts, as well as a number of district and bankruptcy courts. While helpful, this definition must be employed with an eye to the specific facts of each case, and with attention to circumstances which may impair a professional’s ability to offer impartial, disinterested advice to his or her client. Thus, both definitions have as their critical element the presence of an “adverse interest.” “Turning to the facts here, we have little difficulty reaching the conclusion that Butler and Fenasci’s involvement with Burrwood implicated their duty to report under Rule 2014(a) and constituted a potential conflict with their client’s best interests.” By operating as a potential buyer, a lawyer for a bankruptcy estate possesses a predisposition to reduce the price of the estate’s assets, which works to the detriment of the estate, its creditors and its equity stakeholders, the court states. “[T]he bankruptcy court abused its discretion in awarding fees to Butler and Fenasci. Butler and Fenasci had an interest adverse to that of the estate with respect to matters on which they were employed, and in their efforts to promote that interest they violated their duty to their client. There are sufficient grounds on which to deny attorney’s fees. The bankruptcy court’s exercise of discretion was flawed by legal error � the conclusion that Butler and Fenasci had no interest adverse to that of the estate with respect to matters on which they were employed. The court, had it viewed the conflict properly, should not have allowed attorney’s fees to Butler or Fenasci.” OPINION:Higginbotham, J.; Higginbotham, Barksdale and Clement, JJ.

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