BENAVIDES, Circuit Judge:
This case is an adversary proceeding arising out of the Chapter 11 bankruptcy of American International Petroleum Company ("AIPC") and American International Refinery, Inc. ("AIRI") (collectively the "debtors"). Appellant Robbye R. Waldron, the Liquidating Trustee of the AIPC Liquidating Trust (the "Trustee"), filed suit against Appellee Adams & Reese, LLP ("A&R"), the former debtors' counsel, seeking disgorgement of the attorney's fees awarded during the bankruptcy. After a bench trial, the bankruptcy court ordered a sanction of $135,000 for A&R's
At the time of its bankruptcy, AIPC was a public corporation, with various affiliates and subsidiaries, including: AIRI, wholly owned by AIPC; St. Mark's Refinery, wholly-owned by AIPC; American International Petroleum Kazakhstan ("AIPK"), also wholly-owned; and Caspian Gas Corporation ("CGC"), partially owned. AIPC refined, produced, and marketed oil and engaged in oil and gas exploration in Kazakhstan. Through AIPK and CGC, one of AIPC's principal assets was a gas concession in the Shagyrly-Shomyshty gas field, located in Kazakhstan, called License 1551. At the time of its bankruptcy, the debtors' largest creditors were GCA Strategic Investment Fund Limited ("GCA") and Halifax Fund, L.P. ("Halifax").
In January 2004, in a transaction that forms a basis for part of the Appellant's claims against A&R, AIPK sold eighty-five percent of its interest in License 1551 to Bridge Hydrocarbons, LLC ("Bridge"), for approximately $5 million. A substantial portion of this sum was used to pay back-wages and benefits to AIPC's officers.
AIPC engaged A&R to assist in its restructuring in early 2004.
In fall 2004, AIRI and AIPC filed for bankruptcy in the Western District of Louisiana in the same proceeding. The
The bankruptcy action involved conflict over the treatment of GCA's secured claims. The Equity Security Holders Committee (the "Equity Committee") objected to the various bankruptcy plans filed by the debtors, largely on the ground that the plans treated GCA's claims too favorably. Ultimately, in March 2006, the Equity Committee and GCA reached a settlement. The settlement was confirmed by the bankruptcy court and it provided for full payment of all secured and unsecured claims and a distribution to equity holders.
The current adversary proceeding was filed in September 2006 by the Trustee.
The bankruptcy court held a three-day bench trial and issued a memorandum ruling and judgment, finding: (1) that A&R did not have a disqualifying adverse interest; (2) that A&R, nonetheless, failed to make adequate disclosures of its connections to the debtors and to GCA; and (3) that a disgorgement of $135,000 was a proper sanction for the disclosure violations. The bankruptcy court denied all
"This court reviews the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court." In re Scopac, 624 F.3d 274, 279-80 (5th Cir.2010) (citing In re Morrison, 555 F.3d 473, 480 (5th Cir. 2009)). The factual findings of the bankruptcy court are reviewed for clear error and its conclusions of law are reviewed de novo. Id. "[The court's] finding of fact may be reversed only if the reviewing court has the definite and firm conviction that a mistake has been made." Id. (quotation marks omitted). A bankruptcy court's decision to disgorge fees or impose a sanction is reviewed for abuse of discretion. In re West Delta Oil Co., 432 F.3d 347, 358 (5th Cir.2005); In re Prudhomme, 43 F.3d 1000, 1003-04 (5th Cir.1995). A denial of a motion for leave to amend is also reviewed for abuse of discretion. Gentilello v. Rege, 627 F.3d 540, 546 (5th Cir.2010).
On appeal, the Trustee's central argument is that the bankruptcy court erred in finding that A&R did not have a disqualifying interest. Specifically, the Trustee argues that A&R was not disinterested: (1) because GCA paid the bankruptcy retainer; (2) because of A&R's relationship with GCA; and (3) because A&R advised AIPC on how to characterize payments made to officers and directors several months prior to filing the bankruptcy petition.
The Bankruptcy Code requires that a professional retained by the debtor in possession not "hold or represent an interest adverse to the estate," and that the professional be "disinterested." 11 U.S.C. § 327(a); In re W.F. Dev. Corp., 905 F.2d 883, 884 (5th Cir.1990). The term "disinterested" is defined in 11 U.S.C. § 101(14) as a person (1) who "is not a creditor, an equity security holder, or an insider," (2) who "is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor," and (3) who "does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." 11 U.S.C. § 101(14); W.F. Dev. Corp., 905 F.2d at 884. A party has an "adverse interest" to the estate if they: "(1) [] possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) [] possess a predisposition under circumstances that render such a bias against the estate." West Delta Oil, 432 F.3d at 356 (quotation marks omitted); see also In re AroChem Corp., 176 F.3d 610, 623 (2d Cir.1999) (same); In re Crivello, 134 F.3d 831, 835 (7th Cir.1998) (same).
Under Section 328(c), "[a] court may deny compensation for services provided by an attorney who holds such an adverse interest." West Delta Oil, 432 F.3d at 354-55; 11 U.S.C. § 328(c). A bankruptcy court is not required, however, to deny all compensation if an attorney has an adverse interest and is found to not be disinterested. West Delta Oil, 432 F.3d at 355 n. 22 (explaining that the rule is flexible because a bankruptcy court is one of equity); In re Prince, 40 F.3d 356, 359-60 (11th Cir.1994) (same); Gray v. English, 30 F.3d 1319, 1324 (10th Cir.1994) (same).
As noted, the Trustee argues that A&R was not disinterested based on three different grounds. Two of these grounds focus on A&R's connections to GCA and we will consider them together. The most troubling aspect of A&R's relationship to GCA is obviously GCA's payment of the bankruptcy retainer. Courts have taken two approaches when deciding if payment of a bankruptcy retainer by a third-party is a disqualifying interest. Some courts have found that payment of a retainer by a third party is a per se disqualification, while other courts have held that the totality of the circumstances surrounding the retainer payment must be scrutinized before deciding if a disqualifying conflict exists. See In re Lotus Props. LP, 200 B.R. 388, 391-96 (Bankr.C.D.Cal.1996) (explaining both approaches).
Although we have not formally adopted a test in this Circuit, we find that the per se approach is inconsistent with our decision in West Delta Oil. In that decision, we stated that the existence of a conflict should be determined "with an eye to the specific facts of each case." West Delta Oil, 432 F.3d at 356; see also In re Harold & Williams Dev. Co., 977 F.2d 906, 909-10 (4th Cir.1992) (stating that judicially created per se rules for disqualifications are usually not appropriate).
The Trustee also argues that A&R believed that it was bound by the retainer payment to favor GCA's claims. Loyalty to a third-party due to the payment of a retainer would obviously render a party not disinterested. See In re Big Rivers Elec. Corp., 355 F.3d 415, 434 (6th Cir. 2004) (stating that a professional would not be disinterested if payment by creditor was linked to providing favorable result to that creditor). There is some evidence in the record showing that A&R discussed submitting bankruptcy plans that were favorable to GCA. However, the evidence supporting the Trustee's contentions on this point can also be interpreted as simply showing that A&R was aware that confirmation of a plan would require GCA's support, and that the proposed plan must, therefore, be acceptable to GCA. The bankruptcy court found that the record more fairly supported this legitimate inference. We are in a poor position to second-guess that factual judgment, and we now hold that this factual finding is not clear error. United States v. Casteneda, 951 F.2d 44, 47 (5th Cir.1992) (stating that where "two permissible views of the evidence are presented, the district court's choice between them cannot be clearly erroneous.").
Third, the Trustee argues that A&R's divided loyalties are evidenced by its decision not to litigate GCA's secured claim. GCA's secured claim was based on its lien on AIPK's shares and on the assignment of CGC dividends from AIPK. Although there are grounds for questioning A&R's decision on this point, the testimony at trial indicated that A&R considered whether to dispute these claims and decided that the costs of litigation were not in the best interests of the estate, particularly given that the debtors were already litigating Halifax's claims. In its analysis, the bankruptcy court considered the same arguments as are currently presented on appeal, and it found that there was no evidence that A&R's decision was affected by loyalty to GCA. Again, this factual finding is supported by evidence in the record and it is, therefore, not clearly erroneous. See Fairley v. Hattiesburg, Miss., 584 F.3d 660, 673 (5th Cir.2009) ("`If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse ...'" (quoting Anderson v. City of Bessemer, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985))).
Finally, and most suspiciously, the Trustee offers evidence showing that A&R drafted a motion for relief from stay on behalf of GCA during the bankruptcy. The bankruptcy court found, however, that this letter did not evidence any favoritism or loyalty to GCA. Instead, the bankruptcy court credited testimony from Dean Ferguson, who was A&R's lead attorney
Overall, given the factual findings made below, we agree with the bankruptcy court that GCA's payment of the retainer did not create an adverse interest or show that A&R was not disinterested. The facts of this case are not nearly as egregious as those in West Delta Oil, where we found that special counsel for the debtor had an adverse interest because they were actively plotting to harm the estate for their own benefit. 432 F.3d at 357-58. In that case, the attorneys for the debtor attempted to surreptitiously purchase the debtor though an outside investor, while also suppressing other bids to artificially depress the purchase price. Id. at 349-53. We held that disgorgement of all fees was required due to the profound nature of the conflict. Id. at 358. While some of the actions of A&R appear suspicious, this case does not present a totality of the circumstances as egregious as West Delta Oil, and we agree with the bankruptcy court that the relationship between GCA and A&R does not rise to the level of a disqualifying conflict requiring the disgorgement of fees. See AroChem, 176 F.3d at 628 (stating that a bankruptcy court's conclusions on a conflict of interest should be accorded deference); In re Martin, 817 F.2d 175, 182 (1st Cir.1987) (same). Here, unlike in that case, there is no evidence that A&R took action contrary to the interests of the estate or gave legal advice that was colored by loyalty to a third party. Accordingly, we decline to reverse the bankruptcy court's ruling on this issue.
In addition to A&R's relationship to GCA, the Trustee separately argues that A&R possessed a disqualifying interest because of its previous representations of the debtors. Specifically, the Trustee argues that A&R's role in the Bridge transaction prevented it from offering objective legal advice to the debtors. The bankruptcy court found that A&R did not have a conflict because A&R's role in these transactions was limited to a neutral escrow agent.
In January 2004, AIPK transferred eighty-five percent of its shares of CGC to Bridge in exchange for $5 million. A significant portion of the sale price was used to pay the wages and benefits of AIPC's officers. The bankruptcy court's determination that A&R's role was limited to a neutral escrow agent is incorrect based on the testimony at trial. Rather, the testimony showed that A&R, in addition to acting as an escrow agent, also advised AIPC on the accounting treatment of these payments, and counseled AIPC that the payments should be labeled "retention payments for future services." Given this factual error, we must now, therefore, determine whether A&R's legal advice on these payments created a disqualifying conflict.
Although under Section 1107(b) of the bankruptcy code, a professional "is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person's employment by or representation of the debtor before the commencement of the case," 11 U.S.C. § 1107(b), courts have held that the nature of the representation can still create
Although recognizing such conflict is possible, we do not think that the record supports finding one here. As noted by the Trustee, the wages and benefits paid to AIPC's officers and directors may have been avoidable because they were paid close in time to the bankruptcy filing. Nonetheless, the Trustee points to no evidence in the record indicating that A&R's advice on the treatment of these claims was clouded. Instead, the record shows that A&R counseled against disputing these claims because, in its judgment, the potential benefit to the estate was outweighed by the expense of litigating the claims. Although obviously not ideal or best practice, A&R's previous relationship to the debtors is also insufficient to constitute a disqualifying interest.
The Trustee also challenges the bankruptcy court's ruling that $135,000 was an appropriate sanction for A&R's violation of Bankruptcy Rule of Procedure 2014(a). After finding that there was not a disqualifying conflict, the bankruptcy court found that A&R had failed to make adequate disclosures under Bankruptcy Rule 2014(a) of the source of its retainer and of its previous relationship with the debtors. The bankruptcy court found, however, that none of these disclosure errors were intentional and that no harm or prejudice to the estate or creditors resulted. The court ordered a sanction of $135,000, or approximately twenty percent of the total fees awarded to A&R.
"Federal Rule of Bankruptcy Procedure 2014(a) requires any professional applying for employment to set forth `to the best of the applicant's knowledge' all known connections of the applicant with the `debtor, creditors, or 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.'" West Delta Oil, 432 F.3d at 355 (quoting Fed. R. Bankr.P. 2014(a)). The disclosure requirements of Rule 2014(a) are broader than the rules governing disqualification, and an applicant must disclose all connections regardless of whether they are sufficient to rise to the level of a disqualifying interest under Section 327(a). See In re Cornerstone Prods., Inc., 416 B.R. 591, 608 (Bankr. E.D.Tex.2008) (stating that "all" connections must be disclosed); In re Leslie Fay Cos., 175 B.R. 525, 533 (Bankr.S.D.N.Y. 1994) (same).
Courts may deny all compensation to professionals who fail to make adequate disclosure, and "counsel who fail to disclose timely and completely their
The Trustee argues on appeal that the bankruptcy court erred in finding that the disclosure errors were unintentional, arguing that the failure must have been intentional because of the number of times that A&R failed to disclose its relationships to the debtors and GCA. The Trustee is correct that A&R had many opportunities to make full disclosure. Nonetheless, evidence in the record shows that attorneys at A&R believed full disclosure had been made in their employment application, and that the initial disclosure failure was the result of negligence. The testimony at trial indicates the items that were disclosed were compiled by an associate with little or no bankruptcy experience, that they were then listed in the application without verification by Dean Ferguson, and that the application was signed and filed by another attorney with no additional review. Additionally, later email correspondence between Dean Ferguson and another attorney also supports the conclusion that the disclosure errors were inadvertent.
Given that the bankruptcy court's factual findings are reasonable based on the record, we conclude that bankruptcy court did not commit clear error. See United States v. Trujillo, 502 F.3d 353, 356 (5th Cir.2007) (factual findings are not clear error if they are "plausible in light of the record as a whole"). Accordingly, we hold that the bankruptcy court was acting well within its discretion in ordering disgorgement of only a portion of the retainer. See West Delta Oil, 432 F.3d at 355 n. 22 (stating that review of sanctions is for abuse of discretion); In re Cook, 223 B.R. 782, 794 (10th Cir. BAP 1998) (same).
Finally, the Trustee argues that the bankruptcy court abused its discretion when it denied in part his motion for leave to file a third amended complaint.
We review a decision to deny leave to amend under Federal Rule of Civil Procedure 15(a) for abuse of discretion. Gentilello, 627 F.3d at 546; Fed.R.Civ.P. 15(a). When considering whether to allow amendment, a court should consider factors such as "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party, and futility
We hold that the bankruptcy court's decision to deny the amendment was not an abuse of discretion. The Trustee's unexplained delay in bringing these claims weighs in favor of finding that the denial of amendment was proper. See Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir.2003) (stating that a "litigant's failure to assert a claim as soon as he could have is properly a factor to be considered in deciding whether to grant leave to amend," although noting the litigant should not be "punished" for not presenting a claim as "promptly as possible" (quotation marks and citation omitted)). The "newly" discovered documents in this case had actually been available to the Appellants for a significant amount of time.
Similarly, the newly added fraud claims would have dramatically altered the subject matter of the suit at a late juncture. A court is often justified in denying a motion for leave to amend when it would "fundamentally alter the nature of the case." Mayeaux v. La. Health Serv. & Indem. Co., 376 F.3d 420, 427 (5th Cir. 2004). As it stood, this suit was a fairly limited action to determine whether A&R possessed a disqualifying conflict of interest, and potentially, the amount of disgorgement. The fraud claims would not have been factually similar to the disgorgement claim and they likely would have required expansive discovery and litigation, thereby delaying resolution of the case. Accordingly, we hold that the bankruptcy court did not abuse its discretion in denying in part the motion for leave to file a third amended complaint. See Lozano v. Ocwen Fed. Bank, FSB, 489 F.3d 636, 644 (5th Cir.2007) (affirming denial of motion to amend where plaintiff was not diligent in asserting claim for fraud and had failed to take advantage of earlier opportunities to amend); Smith v. EMC Corp., 393 F.3d 590, 595 (5th Cir.2004) (citing "undue delay" as a factor weighing against allowing amendment); Southmark, 88 F.3d at 315-16 (affirming denial of motion to amend where plaintiff sought to add claim that it had knowledge of for almost a year and stating that "[l]iberality in pleading does not bestow on a litigant the privilege of neglecting her case for a long period of time").
For the foregoing reasons, the judgment of the district court is
AFFIRMED.