The Disinterested Creditor: Bankruptcy Court Authorizes Retention of Counsel Despite Prepetition Claim against the Debtor

Contributed by Elizabeth Hendee
In In re Whiteville, the United States Bankruptcy Court for the Eastern District of North Carolina held that debtor’s counsel was “disinterested” under section 327 of the Bankruptcy Code notwithstanding that the firm held a prepetition claim against the debtor.
Section 327 of the Bankruptcy Code governs the qualifications of professionals, including attorneys, in bankruptcy cases.  Section 327(a) provides that a professional must be a “disinterested person” who does not “hold or represent an interest adverse to the estate.”  “Disinterested person” is defined in section 101(14) of the Code as a person who is “not a creditor, an equity security holder, or an insider” of the debtor and who does not “have an interest materially adverse to the estate.”  To avoid falling outside of the literal definition of “disinterested person,” debtor’s counsel typically is paid in full for any fees incurred prior to the debtor’s bankruptcy filing or agrees to waive any remaining claim for prepetition fees and expenses to insure that counsel will not be a “creditor” of the debtor at the time of the filing.
In Whiteville, the debtor, the owner of a convalescent home, sought to retain the law firm of Stubbs & Perdue, P.A., and specifically Trawick H. Stubbs, Jr., to represent it in its chapter 11 case.  Stubbs had represented the debtor prior to its bankruptcy filing and, as of the petition date, was owed approximately $5,000 in connection with that representation, which was incurred “in anticipation of” the bankruptcy filing.
When discussing whether Stubbs qualified as “disinterested” under the Bankruptcy Code, the court noted that the Bankruptcy Code balances the importance of disinterested professionals with the interest of the debtor, as well as the bankruptcy estate, in employing professionals of its choosing.  Section 1107(b) specifically provides that a professional is not disqualified from employment under section 327 of the Code solely because he was employed by the debtor prior to the bankruptcy filing.  When this issue was addressed in another Eastern District of North Carolina case, In re Duffus & Associates, the bankruptcy court struck this balance by holding that an attorney holding a prepetition claim against a debtor could, nevertheless, be disinterested if the claim was relatively modest, traceable to a short time before the bankruptcy filing, and incurred solely in connection with the preparation of the filing.
The Whiteville court chose to follow the doctrine in Duffus and held that, because the amount due to Stubbs was modest and was incurred shortly before the filing and in connection with the preparation of the petition and accompanying papers, the Stubbs firm was disinterested and could be retained in the bankruptcy case.  The court, however, also required that the bankruptcy administrator review Stubbs’s first compensation application to confirm that the fees in question fell within these guidelines.  If any requested fees fell outside the guidelines, Stubbs must agree to waive such fees or request a hearing.  In spite of its ruling, the bankruptcy court noted that it is best practice to have all prepetition fees paid prior to the filing of the chapter 11 petition so that the analysis employed in Duffus and Whiteville could be avoided.