A warning for firms that have unpaid pre-petition fees when they represent a Chapter 11 debtor. From Law.com –
In a stinging 38-page decision, Southern District of New York Bankruptcy Judge Arthur J. Gonzalez denied Windels Marx Lane & Mittendorf any compensation for its work on the bankruptcy of hip-hop media company Source Enterprises Inc.
The New York firm had sought around $526,000 in fees for the five months from September 2006 to February 2007 it acted as debtor’s counsel to Source, publisher of The Source magazine. But Gonzalez said the "manner in which Windels represented the Debtor and the firm’s eventual singular concentration on fees, as opposed to its role as counsel, caused harm to the Debtor sufficient to support a denial of all fees sought."
The judge said Windels Marx had a conflict of interest in representing Source in its bankruptcy proceeding because the law firm was itself a creditor and had a bill outstanding with the debtor company of as much as $200,000 even before the bankruptcy filing.
"Simpson’s continued representation of the Debtor under this strained relationship was at odds with his ethical obligations and was detrimental to the estate," the judge wrote in In re Source Enterprises Inc., 06-11707. "Rather than seeking to rectify his concerns regarding the Debtor, Simpson turned his efforts to securing an avenue for getting his firm’s legal fees paid despite having agreed to defer them." …
The judge said Windels Marx’s desire to be paid may have influenced the proceeding in other ways. Noting that the firm had taken no steps to include affiliated entities of Source in the bankruptcy, Gonzalez said he found it compelling that Windels Marx was a creditor of at least one of these affiliates, whose debt it intended to pursue.