The Bankruptcy Hotline

The court stated that “once a creditor knows of the existence of the automatic stay, forgetting about it does not erase the knowledge.” Moreover, it is not an excuse that the creditor “was betrayed by its computer,” as the “internal disorder” of a creditor does not excuse an automatic stay violation. The court stated that it perceived “no difference as a practical matter between a computer program that does not perform tasks accurately and a clerical employee who does not perform tasks accurately. In either event, the employer bears the risk of the consequences.”

Counsel/Corporate Secretary and His Firm Are Not 'Disinterested'

The Bankruptcy Court for the District of Delaware has ruled that where a partner at a law firm served as corporate secretary for the debtors within 2 years of the filing date, this attorney was an “officer” of the debtors and neither the attorney nor his firm was qualified as a “disinterested person” to be retained by the debtor in bankruptcy. In re Essential Therapeutics, Inc., No. 03-11317 MFW (June 13).

Chapter 11 debtors filed an application to retain counsel and the United States Trustee objected, claiming that law firm was not “disinterested.” The bankruptcy court agreed with the Trustee's office and denied the debtors' application. The court found that because a partner at the firm held the position of secretary of several of the debtors at various times within 2 years of the filing of the petition, this individual was an “officer” of debtors and therefore not “disinterested.” The court rejected counsel's argument that although he was an officer under the debtors' by-laws, his role was only ministerial and he should not be considered an officer of the debtors. The court stated that the words of ' 101(14) “are not ambiguous; they preclude retention if the professional served as an officer of the Debtors within 2 years of the petition date. Congress did not state that disqualification is mandated only if the officer was an executive or had more than a ministerial role.” Therefore, the court refused to inquire into what role the officer may have played, focusing instead on only whether the professional was in fact an officer within the proscribed time.

The court further found that the disqualification of the partner also mandated disqualification of his entire firm. The court found that “not having a general rule which disqualifies the firm because of one member's disinterestedness would require that we interrogate all the members (and even associates) of the firm who will be doing work on the file to ascertain whether the actions of the attorney who served as an officer of the debtor would impair their ability to act on behalf of the debtor and the estate in an impartial manner. This would be a Herculean task.” Second, in enacting ' 101(14)(D), Congress “apparently believed that service as an officer or director of a debtor within the two years before the bankruptcy case was filed would affect 'the essential character of independence and disinterestedness which is required' of counsel for the estate … Given the current climate of distrust of officers and directors of corporations, it is entirely possible that officers of the Debtors may be subject to suit or, at a minimum, to questions regarding their role in the Debtors' demise.” Consequently, it would be impossible for the firm to adequately represent the Debtors' interests.

Computer Error Can Establish a Willful Violation of the Automatic Stay

The Bankruptcy Appellate Panel of the Ninth Circuit has ruled that a creditor is liable under Section 362(h) for stay violations attributable to a computer error. Associated Credit Services, Inc. v. Campion (In re Campion), No. EW-02-1486 (June 4).

The bankruptcy court found a willful violation of the automatic stay by a creditor who was aware that an individual named Michael P. Campion was a debtor in a bankruptcy case, but garnished his wages because its computer failed to recognize that Michael P. Campion of Spokane, WA, and Mike P. Campion of Spokane, might be the same individual. The BAP affirmed.

The court stated that “once a creditor knows of the existence of the automatic stay, forgetting about it does not erase the knowledge.” Moreover, it is not an excuse that the creditor “was betrayed by its computer,” as the “internal disorder” of a creditor does not excuse an automatic stay violation. The court stated that it perceived “no difference as a practical matter between a computer program that does not perform tasks accurately and a clerical employee who does not perform tasks accurately. In either event, the employer bears the risk of the consequences.”

Counsel/Corporate Secretary and His Firm Are Not 'Disinterested'

The Bankruptcy Court for the District of Delaware has ruled that where a partner at a law firm served as corporate secretary for the debtors within 2 years of the filing date, this attorney was an “officer” of the debtors and neither the attorney nor his firm was qualified as a “disinterested person” to be retained by the debtor in bankruptcy. In re Essential Therapeutics, Inc., No. 03-11317 MFW (June 13).

Chapter 11 debtors filed an application to retain counsel and the United States Trustee objected, claiming that law firm was not “disinterested.” The bankruptcy court agreed with the Trustee's office and denied the debtors' application. The court found that because a partner at the firm held the position of secretary of several of the debtors at various times within 2 years of the filing of the petition, this individual was an “officer” of debtors and therefore not “disinterested.” The court rejected counsel's argument that although he was an officer under the debtors' by-laws, his role was only ministerial and he should not be considered an officer of the debtors. The court stated that the words of ' 101(14) “are not ambiguous; they preclude retention if the professional served as an officer of the Debtors within 2 years of the petition date. Congress did not state that disqualification is mandated only if the officer was an executive or had more than a ministerial role.” Therefore, the court refused to inquire into what role the officer may have played, focusing instead on only whether the professional was in fact an officer within the proscribed time.

The court further found that the disqualification of the partner also mandated disqualification of his entire firm. The court found that “not having a general rule which disqualifies the firm because of one member's disinterestedness would require that we interrogate all the members (and even associates) of the firm who will be doing work on the file to ascertain whether the actions of the attorney who served as an officer of the debtor would impair their ability to act on behalf of the debtor and the estate in an impartial manner. This would be a Herculean task.” Second, in enacting ' 101(14)(D), Congress “apparently believed that service as an officer or director of a debtor within the two years before the bankruptcy case was filed would affect 'the essential character of independence and disinterestedness which is required' of counsel for the estate … Given the current climate of distrust of officers and directors of corporations, it is entirely possible that officers of the Debtors may be subject to suit or, at a minimum, to questions regarding their role in the Debtors' demise.” Consequently, it would be impossible for the firm to adequately represent the Debtors' interests.