Bankruptcy Code Definition: Disinterested Person

The Bankruptcy Code defines a “disinterested person” to mean a person that: (a) is not a creditor, an equity security holder, or an insider; (b) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and (c) does not have an interest materially adverse to the interest of the estate or any class of creditors or equity security holders by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.  11 U.S.C. Section 101(14)

The term "disinterested  person" is defined in the Bankruptcy Code to include one who is not a creditor and "does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." § 101(14) (A) and (C).  A person who is disinterested "is one that can make unbiased decisions, free from personal interest, in any matter pertaining to the debtor's estate." Shat v. Kistler (In re Shat), 2009 Bankr. LEXIS 4547 (9th Cir. BAP Nov. 25, 2009).  Thus, one who is a creditor is not disinterested as well for purposes of Section 327(a) of the Code.  Under the Code, a "creditor" is an entity that has a claim against the debtor that arose at the time of or before the order for relief. This is important because Section 327 of the Code provides for the employment of professional persons is a bankruptcy case and prohibits a professional from being employed if they are not disinterested.  For example, In re Textile Indus., 198 B.R. 902, 903 (Bankr. M.D.N.C. 1996) , the Court held that because the professional had a claim against the Debtor that arose before the order for relief was entered, to wit, a claim for compensation for services rendered, that he was not a disinterested person by virtue of its status as a creditor of the debtor both at the time of the filing of debtor's petition and at the time of the application for appointment as accountants for the debtor.  Thus, the accountant was not disinterested (and could not be employed as a professional).

The reason for the “disinterested” requirement is the need for professionals employed by a bankruptcy estate to make full and candid disclosure of all connections, both when applying for approval of their employment and during the pendency of the case. This duty to disclose must be taken seriously --if a professional fails to do so, he or she risks disallowance of all compensation.  In re Sundance Self Storage-El Dorado LP, 482 B.R. 613, 618 (Bankr. E.D. Cal. 2012)    Sundance discusses the requirement that professionals employed by a bankruptcy estate make full and candid disclosure of all connections, both when applying for approval of their employment and during the pendency of the case.  In Sundance, the court found that the debtor's Chapter 11 counsel held and represented interests adverse to the estate and was not a "disinterested person" as defined by § 11 U.S.C.S. § 101(14). First, counsel had represented the debtor in an earlier chapter 11 case and, when the present case was commenced, the debtor owed counsel $3,000 for his services in connection with the earlier case. Thus, counsel was clearly a creditor when he filed the case and, by definition, was not a disinterested person. Second, counsel represented the debtor's primary manager in his personal chapter 13 case and the debtor-in-possession in this case at the same time. In short, during almost the entire pendency of the case, counsel owed his loyalty to two clients. Counsel's employment fell short of compliance with the requirements of 11 U.S.C.S. § 327(a) and the court therefore denied allowance of any compensation pursuant to 11 U.S.C.S. § 328(c).

The Bankruptcy code imposes significant restrictions on professionals who are employed or compensated by a bankruptcy estate so as to prevent professionals from representing interests adverse to the estate. The overarching goals of these restrictions are to ensure undivided loyalty to the estate and to preserve public confidence in the fairness of the bankruptcy system.

Kirk Burkley, Esq.
Co-Managing Partner, Bernstein-Burkley
Chair, ABC Marketing Committee