Memorandum of Decision Re: Failure to Disclose

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re CALIFORNIA FIDELITY, INC.,                                                                                                      No. 95-10110        Debtor. ___________________________/
Memorandum of Decision
     Debtor California Fidelity, Inc., filed its Chapter 11 petition on January 19, 1995. On the day before filing, it gave its Chapter 11 counsel, Wright, Robinson, McCammon, Osthimer & Tatum, two cashiers checks. One check, for $25,000.00, was made as a retainer for Chapter 11 work. The second check, for $25,929.36, was for prefiling services related to the bankruptcy. The firm had also received a payment of $2,000.00 about five weeks earlier for bankruptcy-related services.      In its disclosure statement required by FRBP 2016(b), the law firm disclosed only the $25,000.00 retainer. No mention was made of either the $25,929.36 check or the $2,000.00 payment.      On February 3, 1995, the law firm applied for approval of its employment as counsel for the debtor in possession. The declaration of counsel required by FRBP 2014(a) disclosed only that the firm was "retained" prior to the filing and that the terms of employment included a retainer fee of $25,000.00. No mention of the other payments was made, and the declaration averred that the firm had no connection with the debtor other than representing the debtor "in this proceeding." Believing this to be true, the court entered an ex parte order approving the employment.      Only when the U.S. Trustee brought her motion to vacate the order did the court realize that the firm had violated both FRBP 2014(a) and FRBP 2016(b) by failing to disclose most of the money it had received from the debtor. Because of this nondisclosure, the court grants the motion and vacates the order.      The violation of Rule 2016(b) is clear and flagrant. Section 329(a) of the Bankruptcy Code requires any attorney who was paid anything within one year before the filing to file a written disclosure statement if the payment was made in contemplation of or in connection with the bankruptcy. Rule 2016(b) sets the deadline for such disclosure at 15 days after the petition was filed. The payments in question were not disclosed by the firm until more than a month after the filing, and then only in response to the U.S. Trustee's motion.      The firm argues that the payments were disclosed by the debtor in the debtor's schedules. However, section 329(a) requires a written statement by the attorney, not the debtor. Moreover, it is no justification for a disclosure statement which is patently false that the true information was available in the schedules.      The firm argues that because it was paid in such a manner as to avoid making the $25,929.36 recoverable as a preference, it did not need to disclose the payment in its fee application. However, it is not the place of counsel to decide if there is any sort of conflict of interest. Rule 2014(a) imposes on counsel the responsibility for disclosing all connections it may have with the debtor; it is for the court to determine if the connection rises to the level of a conflict of interest.      Even setting aside the flagrant violation of Rule 2016(b), the court feels strongly that it has been deceived by the firm. The declaration of counsel included with the employment application read for all the world like the firm had no prior relationship with the debtor and had been paid a single retainer fee of $25,000.00, when in fact the firm had done extensive work for the debtor before bankruptcy and had been paid almost $28,000.00 in undisclosed fees. The court feels strongly that by this deception the firm has forfeited eligibility to represent the estate in this case.      For the foregoing reasons, the motion of the U.S. Trustee will be granted and the order appointing the firm will be vacated.
Dated: March 6, 1995                                                                                                      _______________________                                                                                                                                          Alan Jaroslovsky                                                                                                                                           U.S. Bankruptcy