1. INTRODUCTION - Matthew Fink was employed by William Barstow, the original trustee, to sell, among other things, a liquor license which belonged to the debtor. The license was ultimately sold to Alaska Mortgage Group (AMG), a major creditor of the debtor, for $130,000.

AMG and the U.S. Trustee have protested the real estate commission       4 ABR 77  sought by Matthew Fink on grounds of: (a) Fink's failure to disclose an adverse interest both before and after filing of the bankruptcy, (b) a conflict of interest, (c) intentionally misleading the court, and (d) the expiration of the listing agreement before the AMG offer.

After a hearing on March 17, 1995, I find that Realty Center, Inc. (Matthew Fink, Agent) is entitled to a brokerage fee of $13,000 on the sale to AMG of the license for $130,000.

     2. BACKGROUND - Ops, Inc. and a sister corporation, Snadwiches, Inc., operated a nightclub-type business in Eagle River, Alaska, known as McDuffy's. The corporations filed voluntary chapter 7 proceedings on May 26, 1994 and June 14, 1994 respectively.

McDuffy's was located at leased premises of about 28,000 square feet from AMG as landlord to Snadwiches and some individuals as tenants. The premises includes a bar, a dance floor, a restaurant facility, and a ten-room hotel. The business also included furniture, fixtures, and equipment, some of which was owned by AMG and leased to the Snadwiches, and some of which (plus some inventory) was owned by Snadwiches but encumbered by a lien in favor of SBA. Ops also owned the liquor license, which was encumbered by a lien in favor of Stuckagain, Inc., which the trustee initially contested.

William Barstow retained Erik LeRoy as trustee's attorney and sought to sell the business as a unit. Mr. Barstow knew that Matthew Fink, a real estate agent working at Realty Center, Inc., had a listing on the property before the two debtors, Ops and Snadwiches, filed bankruptcy.

The listing had not yet expired when the bankruptcies were filed. Fink told Barstow that he had a prospective buyer, but wanted to assure his fees before disclosing the name of the prospective buyer to the trustee. Although Barstow had not dealt with him before, Fink seemed knowledgeable about selling property of this type and very familiar with the property.

Barstow agreed to seek authorization to employ Fink as a real estate agent for the estate, and an application was filed on July 12, 1994 (Docket Entry 11). In the application, which was prepared by attorney LeRoy for Fink, Fink is designated as a "real estate agent". Fink was naive about the bankruptcy disclosure requirements in connection with       4 ABR 78  employment of a professional by a bankruptcy trustee, and relied on the trustee's attorney to obtain his authorization.

In his affidavit disclosing any potential adverse interests prepared for him by Erik LeRoy, Mr. Fink did not note that he had a prior connection with the debtor (i.e. his listing of the business with the debtor which still had a short period of time to run when the bankruptcy petition was filed). He merely said he was disinterested and that he held or represented no adverse interests. (Docket Entry 12).

The prospective buyer that Mr. Fink had located was a Peter DiMaggio. That sale ultimately fell through after Fink was employed by Barstow. Then, Mike Beauchman, also a real estate agent with Realty Center, proposed an offer from Jose Ramos, dba Don Joses Restaurants, a proprietor of about four Mexican restaurants around Alaska, to purchase the combined assets of McDuffy's.

An earnest money agreement was entered into listing Fink as the listing agent and Beauchman as the selling agent, on Realty Center letterhead. It indicated in the body of the agreement that Beauchman was exclusively the "purchaser's agent." In the agreement, which included all the McDuffy's business property of both debtors, $120,000 was allocated to the purchase price for the liquor license and $70,000 for all other assets.

An application to sell the property was made in the bankruptcy case, attaching the earnest money agreement for a $190,000 cash sale. (Docket Entry 19). AMG objected to the sale of the equipment which it claimed to own and David McCabe, general partner of AMG, filed an affidavit. (Docket Entry 24 and 25). Stuckagain objected, noting that it had a security interest in the liquor license and did not want it sold free and clear. (Docket Entry 21).

A hearing was held on October 21, 1994. AMG noted that it had no deal with Ramos regarding the lease as yet. The SBA also appeared and claimed that it had a security interest in some of the equipment which primed AMG. I noted that there were so many competing interests that it would probably be better for the parties to negotiate a settlement off record rather than to proceed with the hearing that day. Hoping the parties would settle their disputes, I continued the hearing to November 2, 1994.

At the hearing on November 2nd, the trustee's attorney, Mr. LeRoy, indicated with some frustration that the trustee was not able to put a deal together with all the parties so that the business could be sold as a unit. He said the trustee intended to sell only the liquor license, which was only encumbered by a possible lien in favor of Stuckagain, which the trustee thought was significantly less than the value of the license.

The trustee noticed out a sale for the liquor license to Jose Ramos for $115,000, with a bar date for objections of December 20, 1994. See, Docket Entries 28 and 29 for the amended application to sell assets and notice. On December 20, 1994, however, AMG objected to the $115,000 sale (including the $11,500 commission) and countered with a $121,000 offer with no commission payable. (Docket Entry 32).

At a hearing on the sale of the liquor license on January 20, 1995, the parties discussed whether or not Mr. Fink was entitled to a fee for the sale of the liquor license, if the top bidder happened to be AMG. AMG indicated that it was willing to make a bid of $121,000 because most of the money was going to flow back to it anyway as the largest creditor of the estate. AMG claimed that Fink's listing had expired and he had not generated AMG's bid, and was not therefore entitled to a commission on its $121,000 offer. Mr. Ramos was prepared to make a higher bid.

The court suggested that the sale by auction be conducted that day, and that the parties litigate later whether or not Fink was entitled to his fee. If he was not, the court proposed that any sale price paid by AMG would be discounted so that AMG would have 10% of its successful bid refunded to it.

The parties rejected the court's suggestion and wanted to have a hearing two weeks to a month down the road on whether or not Fink should be entitled to a commission. I thought that the sale might be lost if the matter were delayed that long, so I pressed the parties to an early hearing a week later on January 27, 1995, to: (a) determine if Fink were entitled to a commission if AMG was the successful bidder, and (b) conduct the auction sale. On January 20, 1995, Fink was not represented by an attorney, and wanted to hire one to appear at the hearing one week later.

At the January 27, 1995, hearing, I held that Fink was entitled to       4 ABR 80  a brokerage fee, even if the sale was to AMG. AMG moved for reconsideration and the court prepared an order on February 15, 1995, denying it, but that order apparently was not docketed and the court reissued the order on March 17, 1995. See, order at Docket Entry 83.

Also, on March 17, 1995, the court held a hearing which is the subject of this memorandum decision on the Rule 60(b) motion filed by AMG (Docket Entry 49), and the U.S. Trustee's joinder in that motion (Docket Entry 78). The basis of the motion was that Fink failed to disclose that he had a connection with the debtor before the bankruptcy by virtue of having been the agent having a listing on the property. Also, the U.S. Trustee objected to Fink's failure to properly disclose the fact that Realty Center (Fink's broker) was representing both the buyer and the seller in a dual agency. The nondisclosure, both pre and post-petition is grounds for denying or reducing Fink's fees. The dual agency, according to the U.S. Trustee, created an actual conflict of interest which would require denial or reduction of Fink's real estate commission. The U.S. Trustee also indicated that Fink attempted to mislead the court by calling himself a "broker" in the affidavit he filed before the January 27, 1995, hearing as his declaration of direct testimony according to the court's order.

Finally, AMG renewed its attempt to have the fee imposed on AMG's mortgage bid disqualified on the basis of newly discovered evidence regarding the various failures to disclose and the dual agency. AMG also presented some evidence discussing the expiration of the listing agreement which the court had ruled upon on January 27, 1995.

AMG had moved, after the January 27, 1995 hearing, to remove the trustee for failing to disclose he had an interest in a Mexican restaurant within a mile of McDuffy's. The trustee, William Barstow, filed a resignation without contesting the motion, and Larry Compton is the new trustee.

     3.  ISSUES - The issues are:

(a) Did Fink violate FRBP 2014(a) by failing to disclose he was a broker for the debtor immediately before the bankruptcy? If so, should his fees be disallowed or reduced?

(b) Did Fink become "disinterested" because another agent from his       4 ABR 81  brokerage located a prospective buyer and called himself the purchaser's agent? If so, should this "dual agency" result in reduction or denial of Fink's fees?

(c) Did Fink attempt to mislead the court by calling himself a "broker?" If so, should his fees be reduced or denied?

(d) Should Fink have been denied a fee on a sale to AMG since his written listing agreement had an expiration date before AMG made its offer to purchase the liquor license? (This last issue was the one at the January 27, 1995, hearing, but is analyzed below for completeness).

     4. ANALYSIS -

     4.1. The Duty Of A Professional Seeking Employment To Disclose Connections With The Debtor Or Other Interested Parties - The duty to disclose under FRBP 2014(a) provides that:

An order approving the employment of attorneys, accountants, appraisers, auctioneers, agents, or other professionals pursuant to § 327, § 1103, or § 1114 of the Code shall be made only on application of the trustee or committee. The application shall be filed and, unless the case is a chapter 9 municipality case, a copy of the application shall be transmitted by the applicant to the United States trustee. The application shall state the specific facts showing the necessity for the employment, the name of the person to be employed, the reasons for the selection, the professional services to be rendered, any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, or any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. [emphasis added]

This rule is to implement the hiring of professionals, which is covered by 11 USC 327(a), which provides:

Except as otherwise provided in this section, 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 under this title. [emphasis added]

The professional must be both disinterested and not hold an adverse       4 ABR 82  interest. Disinterestedness is a defined term under 11 USC § 101(15) [as newly renumbered under the 1994 Bankruptcy Reform Act]. § 101(15)(E) provides that a disinterested person:

does not have an interest materially adverse to the interest of the estate or of any class of creditor or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor or an investment banker specified in subparagraph (B) or (C) or this paragraph, or for any other reason; [emphasis added]

Thus, the framework is to ferret out any materially adverse interest arising from a connection of the professional with the debtor. To do this, FRBP 2014(a) contemplates the professional will disclose all connections, direct or indirect, not merely those which amount to an "adverse interest."

Such disclosure allows the court or an interested party to make its own determination whether the disclosed connections do amount to an adverse interest or conflict. In re B.E.S. Concrete Products, Inc., 93 BR 228, 235-38 (Bankr ED Cal 1988) (special counsel for debtor under 11 USC § 327(e) failed to disclose conflicting representation of directors who had guaranteed loans; even without an actual controversy, faulty disclosure may be the basis for denial of fees); In re Begun, 162 BR 168, 177-78 (Bankr ND Ill 1993) (a trustee failed to disclose that a real estate broker was a client of trustee's law firm, that some of law firms partners had interest in broker, etc; 5% fee cut from $150,000 to $75,000, although no actual adverse interest was found); and, In re Leslie Fay Companies, Inc., 175 BR 525, 531-33 (Bankr SDNY 1994).

The duty to disclose "connections" is an affirmative duty, wholly apart from whether the connections are adverse or create a conflict of interest. In re Film Venturers International, Inc., 75 BR 250, 252 (9th Cir BAP 1987); In re B.E.S. Concrete Products, Inc. at 236-37.

     4.2.  The Bankruptcy Court Has Broad Discretion About Whether To Sanction A Professional Who Fails To Make Proper Disclosure Of Prior Connections Under The Standards Of FRBP 2014(a) - When applying for employment Fink did not make the disclosure of a connection (i.e., his employment as Ops' real estate agent before the chapter 7 petition was filed. Fink testified he was not aware that he was supposed to disclose this. In his opinion, the bankruptcy terminated the relationship because the debtor no longer owned the property per se; it belonged to the       4 ABR 83  bankruptcy estate. The disclosure nonetheless should have been made in order to comply with FRBP 2014(a).

The U.S. Trustee and AMG indicate that the nondisclosure alone requires that Fink lose his commission, or that it should at least be diminished. Many cases have reached such a conclusion. An example is In re Leslie Fay Companies, Inc.

In Leslie Fay, Weil, Gotshal & Manges, a law firm which has a nationally renowned bankruptcy law department, failed to disclose that it represented, on an individual basis, some members of an audit committee of Leslie Fay. Leslie Fay was a publicly traded company. After it learned of accounting irregularities, it constituted an audit committee composed of outside directors and others. Weil Gotshal represented the audit committee. Later, Weil Gotshal represented Leslie Fay when it filed a chapter 11 case. The law firm, of course, disclosed the existence of a connection because it represented the audit committee, but did not disclose its representation of some of the audit committee's members, or that it represented a major creditor of debtor, or that it represented Bear Stearns, an investment banker. Some of these undisclosed parties were the natural targets of securities and fraud litigations.

Although Bankruptcy Judge Tina Brozman found that no actual conflict still existed (because there were no viable claims against senior management still existing), the debtor and creditors had been caused injury because of the costly and time consuming need to investigate and calling into question of the audit committee's conclusion regarding no impropriety of top management. In re Leslie Fay Companies, Inc. at 536. The sanction of total disgorgement and disqualification was rejected as too harsh, but Weil Gotshal was required to pay for the investigation (estimated to be about $800,000) and was disqualified from starting new matters in the case, though it could complete the ones already commenced. New counsel was required to complete the case.

Judge Brozman noted that she had "wide discretion in my selection of an appropriate remedy. [citation omitted]." In re Leslie Fay Companies, Inc. at 538. Similar discretion was noted in In re Film Ventures International, Inc., 75 BR 250 (9th Cir BAP 1987), in which the court held that failure to disclose a connection under FRBP 2014(a) did       4 ABR 84  not require automatic disallowance of fees.

In Film Ventures, an attorney was employed as special counsel for the debtor-in-possession. The attorney disclosed he had an unpaid pre-petition fee of about $19,000. He did not disclose that several days before filing the debtor had given the attorney a security interest in a motion picture to secure past and future fees.

The attorney applied for fees of about $32,000. The debtor argued that the fees should be reduced or disallowed for failure to disclose this. The BAP said that the attorney had not intended to mislead the court and had performed adequately. The BAP said at 253:

Complete disclosure is for the court's benefit so that it can conveniently and carefully scrutinize any adverse interests of the attorney. See H.R.REP. No. 595, 95th Cong., 1st Sess. 329 (1977); S.Rep. No. 989, 95th Cong., 2nd Sess. 39 (1978); U.S. Code Cong. & Admin. News 1978, p.5787. If the very court for which the statute was intended to aid finds no need to take remedial measures, we see no reason to second guess that court's broad discretion in this area. Therefore, we hold that the trial court did not abuse its discretion in awarding the fees in question.

Accord, In re CIC Investment Corporation, 175 BR 52, 54 (9th Cir BAP 1994).

Applying these principals to this case, Fink's failure to disclose, while improper, was innocent, not intended to mislead the court, and of minimal significance. His listing had ended for all practical purposes by Ops' bankruptcy. There is no conflict due to his failure to disclose this relationship. The trustee knew of it.

     4.3.  The Bankruptcy Court Has Discretion Under 11 USC § 328(c) To Reduce Or Deny Fees If A Conflict Of Interest Develops, But, Fink Adequately Disclosed The Dual Agency And Did Not Intend To Mislead The Court When He Mistakenly Called Himself a "Broker" - In his declaration required by the court before the January 27, 1995, hearing, Fink said he was a "broker." The U.S. Trustee and AMG in the Rule 60(b) motion focus on this as an attempt to mislead the court. Fink said it was an oversight due to the fact his new attorney, David Clark, and he had not had much time to prepare and Clark had used the words loosely. Fink filed an affidavit to clarify this.

The court understood that Fink was an agent and Realty Center, Inc., was the broker. The exhibits including the offer to purchase adequately       4 ABR 85  disclose this. FRBP 2014(a) does not have a requirement of continuously disclosing connections in the format of a verified statement similar to the one filed with the initial application for authority to employ.

An adverse interest may, however, develop after an initial proper employment at a time when no conflict of interest existed. 11 USC § 328(c) covers this situation. § 328(c) provides:

Except as provided in section 327(c), 327(e), or 1107(b) of this title, the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 or 1103 of this title if, at any time during such professional person's employment under section 327 or 1103 of this title, such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.

The U.S. Trustee and AMG argue that a dual agency developed by virtue of Beauchman and Fink being involved in the same real estate company, with one representing the seller and one the purchaser.

Fink presented the testimony of William Barstow, the former trustee, and Kenneth Battley, a panel trustee in Alaska, both indicating that it was common practice to employ a broker in which the ultimate sale occurred through a deal where one agent was the listing agent and another was the selling agent. Although Beauchman also designated himself as working exclusively for the purchaser, the item ultimately being sold was one liquor license and the deal was not complex. The relationship of Fink and Beauchman in this transaction was common according to Battley and Barstow.

And, Mr. Barstow got a relatively good price for the license. Dan Coffey, the attorney for Stuckagain, Inc., a person claiming to be, and who the court believes is, knowledgeable in liquor license matters and values in the Anchorage area, said that the license in question probably had a value of $150,000 sold on terms, and that a $120,000 cash price was not bad. Since the license ultimately sold for $130,000 cash at an open auction, the price was apparently not impaired by the fact that there was a dual agency involved.

Although the parties when signing the Realty Center form neglected to check the appropriate box to say that both parties to the transaction acknowledged the dual agency, it was a fact that both parties were aware       4 ABR 86  of it.

Section 328(c) declares that when a professional employed by the bankruptcy estate ceases to be disinterested, the court "may" deny compensation. The successor trustee argues that this was meant to codify the absolute disallowance of former § 649. We disagree; the plain language of the statute is permissive. Further, even if we could resort to legislative history it favors the permissive construction. See Sen.Rep. No. 95-989, 1978 U.S.Code Cong. & Admin.News 5787, 5825 ("Subsection (c) [of § 328] permits the court to deny compensation ... if the professional person is not disinterested.").

I find, in this case, that there was no intent to mislead, there was no damage from the fact that there was a dual agency, a dual agency is not an unusual situation in the local market, and the participation of Mr. Fink in the transaction ultimately resulted in a sale producing a relatively good price. The court, therefore, denies Rule 60(b) relief which are based on the grounds that Fink became disinterested.

     4.4 The Fact That The Written Listing Agreement Was Not Extended In Writing Before AMG's Offer Should Not Deny Fink a Commission- In a prior hearing, on January 27, 1995, AMG argued that Fink was not entitled to a commission because his listing had expired on November 21, 1994 (See Memorandum Re: Entitlement To Broker's Commission On Sale Of Liquor License, Docket Entry 39 at page 4 filed on January 25, 1995).

AMG cited AS 09.25.010(a)(8), the Alaska Statute of Frauds for the proposition that all real estate commission contracts must be in writing, and AS 08.88.361 indicating that a real estate commission is earned when "the real estate broker fulfills the terms of a written personal services contract." AMG cites other sections of the statutes governing real estate professionals under AS 08.88 in its Supplemental Memorandum In Support Of Motion To Reconsider Commission On Liquor License, And In Support Of Motion For Relief From Order Granting Commission On Liquor License, (Docket Entry 60 filed March 6, 1995).

Fink points out that a liquor license is not real property and that these rules do not strictly govern. In addition, the testimony was that Mr. Fink and the trustee continued their relationship after November 21, 1994, without regard to the expiration, and that the trustee and Fink both considered that their relationship still continued and existed.

In fact, Mr. Fink was trying to close a sale with a prospect, Mr. Ramos, that he had brought to the table before that date. In large part because of the objection of AMG regarding the inclusion of the equipment, the sale which included the liquor license did not close or was delayed. Nonetheless, AMG argues that since it made its offer on December 20, 1994, no commission is required or equitable because of its offer. See Affidavit Of David T. McCabe, (Docket Entry 48 filed on February 15, 1995).

Since the sale originally proposed did not close, in part because of the objection of AMG, there ultimately developed an auction for the license. It would have been difficult to conduct a fair auction where Ramos would have to bid an amount including a 10% commission, as opposed to AMG or some other party bidding at amounts where AMG had to only bid 90¢ to equal $1.00 of their bids.

After hearing testimony on January 27, 1995, the court found that Fink's listing was extended in the eyes of the trustee and Fink. The order authorizing employment of Fink did not limit the length of time of the employment. Under the equities of the case, a commission was earned even on the bid of AMG. In addition, in its memorandum regarding rejection of the commission (Docket Entry 39), AMG cited Beach v. Meyeres Real Estate, Inc., 599 P2d 746 (Alaska 1979); Valkma v. Harris, 575 P2d 789 (Alaska 1978); and Diggins v. Johnson, 513 P2d 60 (Alaska 1973), to indicate that a real estate broker had to have a listing in writing in order to be entitled to the commission. In these cases, however, the commission was sought to be avoided by the owner. In the present case, the contracting party, trustee Barstow, acknowledged the continuance of the brokerage agreement. Barstow could have cured the defect by merely signing an after-the-fact acknowledgement of the relationship. Since he was not contesting the commission, these Alaska cases appear to be inapposite.

At the March 17, 1995, hearing, AMG suggested (as I understand it) Barstow was involved in a conspiracy to see that a competing Mexican restaurant not be set up at McDuffy's. This is related to Barstow's connection with the Mexican restaurant, Garcias, in Eagle River. To accomplish this, AMG suggests that it artificially raised the price AMG would have to pay to keep the license at the McDuffy location. The       4 ABR 88  evidence does not support such a conspiracy. The evidence does support a finding that Barstow was trying to do what most panel trustees do -- sell the assets at the best price possible.

     5. CONCLUSION - This case involves a $13,000 brokerage fee. Not a small amount of money, but certainly not enough, in the court's opinion, to have generated the contentious litigation emanating from AMG. Not only have they challenged Mr. Fink's fees in this court, but apparently have filed proceedings before the Real Estate Commission and the Real Estate Surety Fund. In my opinion, Mr. Fink has done absolutely nothing, or very little, that was wrong, except that he made some innocuous mistakes in disclosure.

The U.S. Trustee has pointed out that she would be frustrated in her job if the court does not support her ferreting out professionals who flaunt the bankruptcy proceeding. I appreciate the U.S. Trustee's efforts. The U.S. Trustee might have felt that the transgressions were much worse than I find them. For example, the dual agency and his loose use of the word "broker." None of these things, in this case, rise to a level where his fees should be disallowed or even reduced.

I have read the U.S. Trustee's brief and listened to her arguments carefully. They have been instructive and helpful. But, I must exercise my discretion in a just manner, and justice requires in this case that Fink get his fee.

Punishing material, undisclosed conflicts is an appropriate goal. But, it is also appropriate to foster confidence in professionals who are employed by a trustee after the court's authorization that their fees will be paid if they have substantially fulfilled their commitments. It is important that professionals do not feel that they have been "stiffed" by the system after they have done their jobs. Trustees would soon not be able to hire professionals of quality. I feel that Fink has done his job and should get his commission.

DATED: March 22, 1995

HERBERT A. ROSS
U.S. Bankruptcy Judge