The verified statement of connections, the no-adverse-interest finding, and the BH&P and Granite Partners adequacy-of-disclosure standards.
An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to Section 327, Section 1103, or Section 1114 of the Code shall be made only on application of the trustee or committee. The application shall be filed and, unless the case is a chapter 9 municipality case, a copy of the application shall be transmitted by the applicant to the United States trustee. The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, 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. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, 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. Fed. R. Bankr. P. 2014(a).
Rule 2014 requires two documents to support an order approving employment of a professional:
The verified statement is the procedural mechanism by which the bankruptcy court evaluates whether the proposed professional satisfies the "disinterested person" and "no adverse interest" requirements of 11 U.S.C. Section 327(a).
11 U.S.C. Section 327(a) permits the trustee, with court approval, to employ professionals "that do not hold or represent an interest adverse to the estate, and that are disinterested persons." The two prongs are independent:
For Chapter 11 cases, Section 327(c) provides that representation of a creditor is not, in and of itself, a basis for disqualification, but an objection by a creditor or the United States trustee can require the court to disapprove the employment if there is an actual conflict of interest.
The verified statement must disclose "all of the person's connections" with the listed categories. The duty is broad and is interpreted with reference to the purpose of the rule: to give the court and the United States trustee the information necessary to evaluate disinterestedness and adverse interest. The leading cases on adequacy of disclosure are In re BH&P, Inc., 949 F.2d 1300 (3d Cir. 1991), and In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998).
In BH&P, the Third Circuit emphasized that the disclosure duty under Rule 2014 is "ongoing" and is not satisfied by a single application at the time of retention. Connections that arise or that become apparent after the initial retention must be supplementally disclosed. The court rejected the argument that only connections the professional believes to be material need be disclosed: the determination of materiality is for the court, not for the professional. The professional's task is to disclose; the court's task is to evaluate.
In Granite Partners, the bankruptcy court for the Southern District of New York elaborated the BH&P duty and articulated the standard that has been widely adopted: the professional must disclose any "connection" - the term is read broadly - and is not permitted to engage in "self-screening" by deciding for itself which connections are sufficiently material to warrant disclosure. The court explained that a "connection" includes any relationship that, viewed objectively, could give rise to a reasonable question about the professional's disinterestedness or potential for adverse interest, even if the professional believes (subjectively) that no actual conflict exists.
The verified statement typically discloses, at a minimum:
Large firms typically run conflict-check databases against the case parties list (creditors, equity holders, professionals, etc.) and disclose the results in the verified statement. The disclosure should describe the search methodology, the parties searched, and any matches identified, along with an explanation of why each match (if any) does or does not constitute an adverse interest.
The Rule 2014 duty is not satisfied by the initial verified statement. Both BH&P and Granite Partners establish that the professional has a continuing duty to supplement the disclosure as new connections become known. Common triggers for supplemental disclosure include:
The consequences of inadequate Rule 2014 disclosure can be severe and have been the subject of substantial published case law. Available sanctions and remedies include:
On the first or second day of a Chapter 11 case, the debtor in possession files an application to retain bankruptcy counsel under Section 327(a), accompanied by counsel's verified statement disclosing the results of a comprehensive conflict check against the parties listed on the petition, top-20 creditor list, and initial schedules. The application proposes compensation under Section 330 and Section 331, and seeks an order approving the employment.
After filing of the amended schedules and the addition of previously unlisted creditors, counsel files a supplemental verified statement disclosing newly identified connections with creditors added in the amendment, explaining why each connection does or does not constitute an adverse interest, and confirming continuing eligibility under Section 327(a).
Rule 2014 is the single most important procedural rule governing professional employment in bankruptcy cases. The verified statement is the document on which the court relies to authorize employment; its accuracy and completeness are the foundation of every fee award that follows. Practitioners who treat Rule 2014 disclosure as a clerical exercise rather than as a substantive professional-responsibility obligation expose themselves to disgorgement, disqualification, and disciplinary referral - outcomes that have been imposed even in cases where the underlying conflict was, in retrospect, immaterial to the case outcome.
Disclose first; characterize second. The professional's job under Rule 2014 is to disclose every "connection" within the rule's broad definition. The job of the court (and the United States trustee, who reviews retention applications as part of the office's standard practice) is to evaluate whether the disclosed connections amount to a disqualifying adverse interest. A professional who "self-screens" connections out of the verified statement has substituted its own judgment for the court's and violated the rule even if no actual conflict existed.
This page provides general information about Federal Rule of Bankruptcy Procedure 2014. It does not constitute legal advice. The applicability of Rule 2014 to specific professional engagements should be evaluated by qualified counsel.