IN RE FIBREX, INC., (Bankr.S.D.Ind. 2001)

JAMES K. COACHYS, Judge United States Bankruptcy Court.

This matter comes before the Court on the Official Creditor Committee's (the "Committee") Objection to Claims (the "Objection"), which alleges in part that the claim filed by Carnow Associates, LTD ("Carnow") should be overruled, and on Carnow's Motion to Strike, filed in response to the Committee's objection. Following a hearing, the Court took the matter under advisement and instructed the parties to file briefs on their respective positions Having reviewed the parties' submissions and relevant authorities, the Court issues the following Order, by which it sustains the Committee's Objection and denies Carnow's Motion to Strike.

Fibrex, Inc., the Debtor herein (the "Debtor"), commenced a case under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Code"), on February 13, 1998. The Debtor has continued as a debtor in possession throughout the pendency of the case. On April 8, 1998, the Debtor moved to employ Carnow to perform employee benefit consultation and administration (the "Application"). The Debtor's motion indicated that Carnow had provided pre-bankruptcy services to the Debtor but did not indicate that Carnow was still owed any money for those services. Along with the motion, the Debtor filed an Affidavit of Disinterest from Carnow's president, Donald S. Carnow (the "Affidavit"), which provided that Carnow did not hold any interest "materially adverse to the interests of the estate . . . by reason of any direct or indirect relationship to, connection with, or interest in, the Debtor . . . ." The Affidavit did not indicate that Carnow held a pre-petition claim against the Debtor. On April 17, 1998, the Court approved the Application without objection. On June 8, 1999, the Court entered an order allowing post-petition fees to Carnow in the amount of $3,448.40 for services relating to services provided to the Debtor from March 6, 1998 through December 15, 1998.

Prior to the allowance of these fees, Carnow filed a proof of claim in the amount of $5,764.50 for pre-bankruptcy services provided to the Debtor. On June 20, 2001, the Committee filed its Objections to Claims, which provided, inter alia, that Carnow had waived its pre-petition claim against the Debtor by virtue of Code § 327(a). Carnow then filed its Motion to Strike, alleging that the objection should be stricken because it was vague and intended merely to be vexatious.

It is undisputed that Carnow had, as of the commencement of this case, a general unsecured claim against the Debtor's estate. However, the existence of this claim was not disclosed in either the Application or in the accompanying Affidavit. As such, the Committee insists that Carnow forfeited or waived its claim against the bankruptcy estate. The Court agrees. Section 327(a) of the United States Bankruptcy Code, 11 U.S.C. § 101, et al. (the "Code"), provides that the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee's duties. Pursuant to Code § 101(14), a "disinterested person" is a person that is not a creditor of the debtor. Thus, there is no question that Carnow was not disinterested for purposes of § 327(a).

The record in this case suggests that Carnow's application for employment would not have been approved by the Court absent waiver of its unsecured claim. At about the same time it moved to employ Carnow, the Debtor sought to employ Ayotte and Samonds, Ltd. ("AS") as its accountant. The Debtor's supporting application disclosed that the firm held a "modest" claim against the Debtor for pre-petition services. The United States Trustee filed an objection to the application, which provided that the objection would stand unless AS waived its claim. Based on this objection, AS did, in fact, waive its claim.

The Court assumes that the Debtor's Application would have drawn a similar objection from the Trustee had it properly disclosed the existence of Carnow's pre-petition claim. And, like AS, Carnow would have been required to waive its claim in order to obtain court approval for its employment by the Debtor. Based on the "precedent" set in this case, the Court concludes that Carnow's claim should be treated as if it had been waived.

Carnow directs the Court to the following cases for the proposition that a professional may be employed by the debtor in possession notwithstanding the fact that the professional holds a pre-petition claim: In re Viking Ranches, Inc., 89 B.R. 113 (Bankr.C.D.Cal. 1988); In re Best Western Heritage Inn Partnership, 79 B.R. 736 (Bankr.E.D.Tenn. 1987); In re Heatron, 5 B.R. 703 (Bankr. W.D.Mo. 1980); In re Martin, 817 F.2d 175 (1st Cir. 1987); In re Siliconix, Inc., 135 B.R. 378 (Bankr.N.D.Cal. 1991). For purposes of this Order, the Court need not determine whether it agrees with any or all of these cases. It is significant to the Court that, in most of the above-cited cases, the professional disclosed the existence of its pre-petition claim from the outset, thus allowing the Court and interested parties to examine whether an actual conflict existed between the interests of the professional and those of the debtor in possession. Here, in contrast, Carnow failed to disclose its pre-petition claim and has offered no real explanation as to why this information was not included in either the Application or Affidavit. The Court declines Carnow's invitation to make a finding now, at this last stage in the case, that it was appropriate for Carnow to be employed by the Debtor, notwithstanding its pre-petition claim.

Had it known that it would have been required to waive its claim to be employed by the Debtor, Carnow argues that it would have sought the employment of its president, Donald S. Carnow, as "special counsel." As Carnow points out, § 327(e) of the Code provides that the trustee (or debtor in possession) may employ counsel for a "specified special purpose" so long as the proposed counsel "does not represent or hold an interest adverse to the estate concerning the matter for which such counsel is to be employed." Again, Carnow cannot avail itself of an argument that should have been made when it first sought court approval for its employment by the Debtor. Mr. Carnow's president, in submitting his Affidavit, was charged with disclosing any fact that could bear on Carnow's employment. Given its failure to do so, the Court will not now enter what would amount to a nunc pro tunc order approving Mr. Carnow as special counsel.

Finally, the Court notes that, pursuant to Code § 328(c) and relevant case law, a Court could require Carnow, because of its interest in the estate, to disgorge the $3,448.40 in fees it previously received in this case. While the Committee did not seek this remedy, there is nothing to suggest that the Court is prevented from ordering disgorgement sua sponte. Given that the Debtor's unsecured creditors are unlikely to receive a 60% dividend on their claims (which would approximately equal the amount Carnow received in fees), Carnow is better off having to waive its pre-petition claim against the Debtor than having to disgorge its fee.

Based on the foregoing, the Court sustains the Committee's Objection To Claims to the extent it related to Carnow's proof of claim and denies Carnow's Motion to Strike.