THE ETHICS OF REPRESENTING DEBTORS AND CREDITORS IN BANKRUPTCY

fees on grounds of quantum meruit, a substantial contribution to the case, or other equitable grounds.²⁴⁴ If the attorney was approved as counsel, and later found disqualified, courts are divided on their discretion to award or not award fees.²⁴⁵

3. In many reported cases, the courts appear to have denied payment of all fees to attorneys who did not meet disinterestedness requirements.²⁴⁶ In so holding, several courts emphasized that the attorney failed to disclose grounds for disqualification.²⁴⁷ Fee disallowance

was imposed even when, in retrospect, no harm has been shown from the facts that should have been disclosed.²⁴⁸ Other courts have not required total disgorgement when the need for attorney discipline is outweighed by the equities of the case.²⁴⁹ 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.²⁵⁰ Another accomplished a similar result by subordinating fees to unsecured creditors' claims.²⁵¹ The court may approve a settlement of disqualification, and non-disclosure allegations between the U.S. Trustee and the affected professional.²⁵²

4. When an arguable preference has been received, no fees can be allowed and

paid until preference issues are resolved.²⁵³ 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.²⁵⁴ Nondisclosure harming the estate may be sanctioned without the court also finding a conflict of interest.²⁵⁵

1. The court may order fee disgorgement to the estate even if the fees were originally paid by third parties.²⁵⁶
2. Courts have also required disgorgement of fees received from the estate without prior court disclosure, and reduced fees for nondisclosure of all compensation arrangements.²⁵⁷

7. DIP clients suffer repercussions from disqualification after the case is underway, as well. Withdrawal may require duplicative catchup time of new counsel that a company in distress may not easily afford.²⁵⁸ The DIP may also suffer from the court's vacating of critical orders obtained by disqualified counsel.²⁵⁹

8. An evidentiary hearing is not required before a court requires disgorgement of

fees on grounds of disqualification.²⁶⁰ Courts are divided on whether a decision to appoint or disqualify counsel or sanction counsel's disqualification through reduced or disgorged fees on an interim basis is an interlocutory, nonappealable order.²⁶¹