Previously, the bankruptcy court granted the Debtor’s Motion to Employ Jones and DJP (the “Special Counsel Motion”) for the “limited purposes” of representing the Debtor “with respect to such corporate and securities matters as may be requested.” The Special Counsel Motion disclosed the fact that DJP was prepetition counsel to the Debtor and was owed a prepetition debt, but did not state the amount owed, which was in excess of $500,000. The Debtor asserted in the Special Counsel Motion that since special counsel employed under Section 327(e) of the Bankruptcy Code are not subject to the same strict disinterestedness standards as general bankruptcy counsel employed under Section 327(a), the existence of such a relationship and a prepetition debt did not disqualify DJP from representing the Debtor as special counsel.
While special counsel employed under Section 327(e) need not be disinterested, it may not hold an interest adverse to the debtor or estate with respect to the matters for which counsel is to be employed. See, e.g., In re Tidewater Mem. Hosp. Inc., 1102 B.R. 221, 228 (Bankr. E.D. Va. 1989). The employment must be for a special purpose and may not involve the general administration of the estate. In re Brokers, Inc., No. 04-53451, slip op. (Bankr. M.D.N.C. Jan 14, 2005) (J. Aron). Furthermore, attorneys cannot purport to serve as special counsel to bypass disinterestedness requirements while in fact acting as bankruptcy counsel. Accordingly, it was “was incumbent upon DJP to avoid work that approached the line between general bankruptcy services and specialized corporate and securities work” and the other parties in the bankruptcy case were entitled to wait until an actual Application for Compensation was filed to decide if DJP had “crossed that line.” From the description of services provided in the Application, the bankruptcy court “was able to identify no services that are associated with specialized corporate and securities work and only one expense”, with all other activities involving the general administration of the estate. DJP was provided one further opportunity to amend or supplement its Application to show work done as special counsel only.
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