Chapter 11 Attorneys: 6 Requirements the Bankruptcy Code Places on Debtor's Counsel

A Chapter 11 company cannot hire its lawyer the way it hires an accountant for tax season. The lawyer is a professional of the estate, and the Bankruptcy Code allows that relationship to begin only with a judge's order, supported by a sworn account of every connection the lawyer has to anyone in the case.

Owners meet this requirement as a delay, a form, a hearing on a motion they did not know existed. It is better understood as six conditions the lawyer must satisfy, before and during the case, and it explains why a lawyer who seemed ideal on the first call may prove ineligible by the third.

1. Employment Begins With an Application the Court Must Grant

Section 327(a) authorizes the trustee, "with the court's approval," to employ attorneys and other professionals. Where the company continues as debtor in possession, Section 1107(a) gives it the trustee's rights and powers, including this one.

The procedure is Bankruptcy Rule 2014(a), which permits the court to approve employment "only on the trustee's or committee's application." The application must state why the professional is needed, who the professional is, why that person was chosen, what services will be performed, and the proposed compensation arrangement. It is filed by the debtor, about its own lawyer, an arrangement that makes sense only because of what the next requirement adds to it.

2. The Verified Statement Discloses Every Connection

Rule 2014(a) requires the application to set out "all the person's connections with" the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, and any person employed in the office of the United States Trustee, and it requires that disclosure to be supported by "a verified statement of the person to be employed."

The word is connections, which is broader than conflicts, and the breadth is deliberate. A lawyer does not decide which relationships matter and disclose those; the lawyer discloses the relationships and the court, the United States Trustee, and the creditors decide which of them matter. A firm that once collected receivables for a revenue-based funder in an unrelated matter, a partner whose spouse works at a creditor bank, an associate who clerked for the judge, a prior engagement for the owner's other company, a lease the firm itself holds with the debtor's landlord: each belongs in the statement, and a statement that omits one invites a later motion that can reach back to the fees.

The verified statement works the way a ship's manifest works in a port with a customs house: the cargo that matters most is the cargo nobody thought worth listing, and the inspector is not obliged to accept that it was forgotten.

The rule asks for connections, not conclusions.

Owners should read the statement before it is filed. They know relationships the firm may not, and a connection the owner mentions in the first week costs far less than one a creditor raises in the sixth month.

3. Disinterestedness Has Three Parts and a Two Year Memory

The professional must also be a "disinterested person" under Section 101(14). The definition has three clauses. The person is not a creditor, an equity security holder, or an insider; is not and was not, within two years before the petition, a director, officer, or employee of the debtor; and does not have an interest materially adverse to the interest of the estate.

The second clause has a clock in it. Twenty-three months before the petition, in a hypothetical, a lawyer resigns as corporate secretary of a client company to avoid any appearance of divided roles. The resignation was sensible. It was also too recent, because the two-year window has not closed on the date of filing, and the lawyer is not disinterested for this case regardless of how good the lawyer's reasons were.

The third clause is the elastic one. "Materially adverse" has no list attached, and it is where a lawyer's personal investments, family ties to a creditor, or a role in a transaction the estate may wish to challenge are weighed, one case at a time, against the interest of the estate.

4. Earlier Work for the Company Is Permitted; an Unpaid Invoice May Not Be

Section 1107(b) keeps the company's regular counsel eligible: a person is not disqualified "solely because of such person's employment by or representation of the debtor before the commencement of the case." The history is not a problem. The balance may be. A lawyer owed money for prepetition work is a creditor, and a creditor is not disinterested.

And in Subchapter V, Section 1195 relaxes the rule for small claims, providing that a person is not disqualified solely for holding a prepetition claim of less than $10,000. Outside that subchapter the ordinary rule governs.

5. Fees Are Awarded by Application, Reviewed by the Trustee

Approval of employment is not approval of fees. Compensation from the estate requires a separate application under Rule 2016(a) and an award under Section 330, and under Title 28, Section 586(a)(3)(A), the United States Trustee reviews those applications and may file comments or objections. Interim applications are allowed, by Section 331, no more than once every 120 days unless the court permits otherwise.

6. The Conditions Continue Through the Case

Section 328(c) permits the court to deny compensation if, "at any time during such professional person's employment," the professional is not disinterested or holds an adverse interest on the matter at hand. Disinterestedness is not tested once, at retention, and then set aside. Whether a lawyer who learns of a new connection in the eighth month should disclose it and stay, or withdraw, is a judgment the statute leaves to the lawyer and, in the end, to the court.

The disclosure itself can fit on a single page.

What This Means Before Choosing a Road

Delancey Street is outside this structure entirely. As a debt settlement company and not a law firm, it cannot be employed as debtor's counsel, files no retention applications, and appears at no hearings. Its work is the confidential initial review, offered without charge, of whether merchant cash advance obligations can be resolved by negotiation, with independently licensed counsel brought in when legal questions arise. Some businesses need exactly the court-supervised process these six requirements protect: the stay, a plan that binds dissenters, a court order permitting the use of cash collateral that a funder will not release. For them, a lawyer who clears the Section 327 conditions is the right first call. For others, a negotiated resolution may make the retention hearing unnecessary.