THE ETHICS OF REPRESENTING DEBTORS &
CREDITORS IN BANKRUPTCY

courts emphasized that the attorney failed to disclose grounds for disqualification. Fee disallowance was imposed even when, in retrospect, no harm has been shown from the facts that should have been disclosed. Other courts have not required total disgorgement when the need for attorney discipline is outweighed by the equities of the case. One court, explicitly exercising its discretion and flexibility to correct a situation, denied payment of additional fees until a plan providing for payment of 100% of all creditors' claims was confirmed and implemented, to avoid speculation as to actual harm caused by conflicting interests. Another accomplished a similar result by subordinating fees to unsecured creditors' claims. The court may approve a settlement of disqualification, and nondisclosure allegations between the U.S. Trustee and the affected professional.

1. When an arguable preference has been received, no fees can be allowed and paid until preference issues are resolved. Intentional nondisclosure may be treated as a fraud on the court, warranting denial of all compensation as a severe sanction, and ignoring other factors applicable in cases where concealment is not intentional. Nondisclosure harming the estate may be sanctioned without the court also finding a conflict of interest.
2. The court may order fee disgorgement to the estate even if the fees were originally paid by third parties.
3. Courts have also required disgorgement of fees received from the estate without prior court disclosure, and reduced fees for nondisclosure of all compensation arrangements.

This outline is adapted from Chapter 27, Ethical Responsibilities, Norton Bankruptcy Law & Practice 2d (Thomson-West 2005)