Estate of Arlene Townsend, et al. v. Steven M. Berman, et al.

The Bankruptcy Code burdens professionals retained by a bankruptcy estate pursuant to 11 U.S.C. § 327 to demonstrate the absence of any conflicts of interest, by placing an affirmative duty upon the professional to disclose “all of the person’s connections with the debtor, creditors, [and] any other party in interest.” FED.R.BANKR.P. 2014. Here, the Bankruptcy Court decided that a bankruptcy trustee’s general and special litigation counsel had no duty to disclose their representation of nursing home landlords and owners sued by the bankruptcy estate’s largest creditors in connection with the triggering events for the bankruptcy petition. The Bankruptcy Court decided to permit no discovery on the matter, and likewise refused to hold a hearing on the matter. The U.S. District Court and the Court of Appeals upheld these decisions. This being a matter of first impression in this Court, the question presented is: Can bankruptcy courts effectively shift the burden as to 11 U.S.C. § 327 employment, absolving bankruptcy professionals from the burden of complete disclosure of connections to the bankruptcy estate, and correspondingly placing the burden of investigating bankruptcy professionals’ connections with the bankruptcy estate upon the trustee and parties to the bankruptcy?