Disclose (Publish) or Perish Part I Connections Discovery and Disclosure Techniques
The bankruptcy disclosure rules continue to torture lawyers and advisors seeking court-approved retention in bankruptcy cases. The rules not only impose unusual information-gathering burdens, but encapsulate a classic ethical tension between the duty to disclose and the desire to conceal (or at least ignore) information that may jeopardize the sought-after employment.
However, time and again the problem is not whether to disclose an easy-to-identify conflict of interest. Those conflicts usually nip the engagement in the bud, and a professional who conceals that kind of conflict would be guilty of serious misconduct. Instead, the typical problem concerns discovery and disclosure in the enormous gray area of "connections" that do not pose disabling conflicts. Because the Bankruptcy Code and Rules do not define the "connections" that must be disclosed nor spell out what professionals must do to discover the connections that they may have, professionals may fail to do enough to uncover connections, and where connections are uncovered they may decide (usually incorrectly) that some connections need not be disclosed.
Bankruptcy Rule 2014(a) provides, as a condition of employment of "attorneys, accountants, appraisers, auctioneers, agents or other professionals" for debtors, official committees and otherwise where the professional engagement must be approved by the court, an "application," which includes, among other things, "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 U.S. Trustee or any person employed in the office of the U.S. Trustee." The information must also be verified by the person to be employed.
The difficulty of discovering and disclosing connections under Bankruptcy Rule 2014 was the principal theme of the "Ethics Update" panel at ABI's Annual Spring Meeting in Washington, D.C., in April. The panel members (Hon. Robert E. Gerber, Southern District of New York; John W. Ames, Greenebaum Doll & McDonald PLLC; Robert S. Hertzberg, Hertz, Schram & Saretsky PC; and the author, as moderator) had intended to cover a number of topics during the 90-minute session, but were frequently drawn back into connections disclosure issues by the audience. Part I of this column focuses on the first of two of the problems and potential solutions that were discussed during the panel session, Techniques for Discovering and Disclosing Connections. Part II, which will appear in a future issue of the ABI Journal, will cover issues of supplemental connections searches and disclosure and how to assure continued employment, including a discussion of new procedures being followed by some judges in the U.S. Bankruptcy Court for the Southern District of New York.
There is no one correct way of uncovering connections. What works for a solo practitioner or small professional firm is not likely to work in very large professional service firms with literally thousands of professionals and employees. Furthermore, some firms may have technological capabilities to facilitate their connections searches that other firms may lack. If done correctly, however, you should be able to answer at least the following two questions in the affirmative: First, will the court or any party in interest be able to question my diligence in seeking to discover all connections that may exist between my firm and the parties in interest? Second, will the court or any party in interest be in a position to assert that I have failed to ask an obvious question or otherwise left out of my search an obvious person or category of persons to question that may have elicited additional connections?
In each question, the focus is on what the court or parties may think, not on what the party conducting the search may believe about its own diligence. Most of us have a tendency to believe that we have done a very good and diligent job in adopting and implementing several techniques. By contrast, examining our search techniques through the eyes of the court or parties in interest, and especially of our adversaries, enables us to avoid being victimized by our own good intentions. Other parties will never be as good to us as we are to ourselves.
Most professional service firms employ basic computer systems to track client engagements, and this is where any connections search must begin. The names of the debtor and its affiliates, directors and officers, all known creditors, all known parties in interest, attorneys and accountants for those persons, and the U.S. Trustee should all be fed into the computer system. At a minimum, this should disclose prior client engagements either on behalf of (or adverse to, as in a litigation) such parties. This standard search, which is quite similar to the conflicts search that most firms conduct prior to accepting non-bankruptcy engagements, is particularly useful in uncovering prior connections that may pre-date the experience or memories of the human sources of information that must also be searched. Caselaw under Rule 2014 makes clear that prior connections are considered "connections" for purposes of the rule that must be disclosed, and there is no rule or principle that establishes any form of retrospective statute of limitations that might afford a cutoff date. "[T]he professional cannot pick and choose which connections to disclose. No matter how old the connection, no matter how trivial it appears, the professional seeking employment must disclose it." In re EWC Inc., 138 B.R. 276 (Bankr. W.D. Okla. 1992).1
Some readers may be groaning at the recommendation to feed into the computer the names of all known creditors, thinking of large chapter 11 cases with hundreds, if not thousands of names, and the attendant burden. However, some basic common sense and good faith should permit the burden to be mitigated. Where there are hundreds or thousands of creditors to be searched, it is reasonable to draw a search line by number of creditors or dollar value of claims (e.g., the top 100 creditors or all claims above $10,000), but only—and this is critically important—where the search methodology is fully disclosed. That way the court, the U.S. Trustee or any party in interest can second-guess your line-drawing, and require more searching. To illustrate, in a case with thousands of creditors, if you searched the names of all creditors with claims above $10,000, your disclosure would consist of at least the following: "(1) the firm has the following connections to creditors:______________; (2) because there are more than 1,000 known creditors and a search of every name would be unduly burdensome, the firm searched the names only of those creditors with claims in excess of $10,000, representing the top __ known creditors in the case. It is conceivable that the firm has connections with one or more of the creditors with claims of $10,000 or less whose names were not searched. The firm respectively submits that any such connections should be deemed immaterial and excepted from disclosure in the circumstances of this case."
The $10,000 figure may be too high in some cases, and some courts or parties may not agree that there should be any cutoff at all. What is important is that the disclosure of the methodology shows the good faith and diligence, provides the opportunity for second-guessing, and affords the chance to supplement the search if a serious objection is made. Under no circumstances should the professional choose to search less than all of the known creditors and parties in interest without disclosing that fact and the reasons why. The rationale for reasonably reducing the search burden at the outset of a case will never succeed as an excuse for failing to exercise diligence in searching for connections if the professional is called upon to explain a subsequently disclosed connection among the creditors who were not originally searched.
The same principle should apply to our human information searches. Do we ask about the connections of (a) all partners, (b) all associates, (c) only partners or associates on the case, (d) all secretaries and support staff, or (e) only those support staffers on the case? Can we take the position that the "person," if it is a law or accounting firm, has relevant connections only through its partners, or must we ask about connections of every single person in the firm? The law does not supply an answer. It only affords, through different case samples, rationales for doing what seems reasonable in the circumstances. Thus, your only protection remains transparency. If a decision is made to ask about connections of less than every person associated with the professional "person" to be employed, it should be disclosed in some manner so it can be second-guessed. In a large law firm of 1,000 lawyers or more, it may not make sense to make "connections" inquiries beyond (a) all firm partners and (b) those associates intended to be engaged in the case, because of the sheer burden involved. But then the disclosure affidavit should state the limits of the search, or disclose the categories of persons (secretaries, support staff, etc.) of whom inquiries were not made, and give the rationale for the decision. In smaller firms, burden distinctions among partners, associates, staff and others may not be considered reasonable.
In any event, the disclosure of a reasonable search methodology cannot excuse you from what you actually know. If you chose a $10,000 cutoff knowing that one of your firm's clients had a $9,000 claim, your disclosure of methodology should not protect you from sanction for failing to disclose a connection. If you failed to make connections inquiries of your firm's secretaries, knowing that one of them was dating a director of the debtor, you have no excuse even if you report that on the basis of burden you elected not to inquire of secretaries. Here, the problem is not the good faith of the methodology, but the good faith of the rationale of burden, given your knowledge. If you did not know about the secretary's relationship, the failure to uncover it becomes convincingly inadvertent, and there should not be a sanction so long as timely disclosure was made once the information came to light.
This example of a secretary's relationship with an officer or director of the debtor was discussed during the ABI Spring Meeting panel on ethics, and carries with it a host of interesting related issues. For reasons of law having nothing to do with bankruptcy, it is likely that you cannot ask an employee directly about a personal relationship he or she may or may not be having. For purposes of this example, it should be assumed that the relationship was either known to the reporting professional or was disclosed in response to a standard, generic question seeking any "connections" with officers and directors. Furthermore, there is the issue of confidentiality raised by the need to make the disclosure. On ethical, if not legal, grounds, it may be inappropriate to identify the specific employee involved in the relationship. It would appear that should such a situation present itself, it can be dealt with by disclosing that a relationship exists without disclosing the names of the persons involved, and further by disclosing whether the professional firm employee involved in the relationship is to be engaged in the matter in any way. This makes a disclosure with a limiting methodology that can be second-guessed. Should additional disclosure be required, presumably the parties could attempt to do so in camera or otherwise under seal so that confidentiality can be protected.
The point is to assure that your search and disclosure process is completely transparent. Where it is not, there is an implication that a professional's judgment was employed to avoid the disclosure of a connection that might pose a problem. The reason for such an implication is quite simple. Failures to disclose become issues in bankruptcy cases precisely because they are failures. A connection comes to light, important case time has passed and many things have happened in the bankruptcy case while the connection remained concealed, and the question is focused entirely on the failure. Why wasn't the connection disclosed at the beginning of the case? There is a big difference between referring to an explanation contained in an initial Rule 2014 affidavit and providing the very same explanation, retrospectively, for the first time when the connection is disclosed.
The professional's judgment is also implicated in failures to disclose because such failures provide litigation opportunities for disgruntled parties in interest who will seek to exploit the failure. No matter how innocent or well-intended the search methodology and failure to disclose, experienced adversaries in a litigation context will do everything possible to make it seem deliberate and venal. Transparency of methodology does not provide a complete excuse (especially if the professional knew or had reason to know that the chosen methodology would conceal information), but certainly mitigates the focus on the failure.
Many professionals have developed detailed questionnaires that can be customized to a particular engagement, and distributed within their firms by hardcopy or e-mail. These questionnaires, like a kind of interrogatory, are not only useful means of gathering information. They are also excellent evidence of the diligence of the search, which may be appended to a disclosure affidavit. According to information provided by audience members during the Annual Spring Meeting panel discussion, some firms require that recipients return a signed copy of the questionnaire, even if no connections are discovered, to assure that the search was thorough.
E-mail technology also provides a useful means of distributing connections questionnaires in larger firms, and "return receipt" options in most e-mail software allow the sender to verify that the questionnaire has been received by those who are being searched.
In either hardcopy or e-mail inquiries, a common ethical and disclosure problem concerns verification that the information was received and that responses were provided where appropriate. Requiring a signed, returned copy of a questionnaire may work in smaller firms, but would likely involve endless delays and be infeasible in a larger firm. With e-mail distributions, some people may open and delete the message without really reading it or responding to it. The answer, I believe, is to expect judicial tolerance of reasonable, good-faith diligence. We have to assume that people respond as honestly when they return written questionnaires as they do when they receive e-mail, and assume likewise that failures will be isolated and rare. In a large firm, it should be sufficient from the perspective of good-faith diligence to disclose that, for example, e-mail inquiries were made of 500 partners, that responses were called for unless there were no connections to report, that a non-response would be assumed to be a report of no connections, and that the e-mail system confirmed that all received the inquiries.
Some may quarrel with the decision to assume that a non-response means there was no connection to report, and may feel more comfortable requiring persons to make a response one way or the other. This is a prudent course to follow where it is feasible to do so, but in large firms it may require tremendous time and effort to follow-up. To assure that our e-mail inquiries on connections receive appropriate attention, we place large, blockletter warnings at the outset, concerning the penalties that the court may impose on the firm or possibly the individual for failing to disclose connections.
1 As a practical matter, therefore, the only real limits to retrospective searches and disclosures are technological. Once lost to human memory and otherwise beyond the database of the computer system (either because it was not input or because the information was deleted under a standard information destruction policy, for example), it cannot be uncovered with reasonable diligence. Should such an "outdated" connection later be uncovered from some source, and assuming it is then timely disclosed, the failure to uncover and disclose it at the outset of the engagement should not in these circumstances be cause to criticize or penalize the reporting professional. Return to article