Rio Valley Motors Company L.L.C.

1 The Bank has objected to the employment on several
grounds, including that Applicant and Counsel have taken too long
to notice out the application and that Counsel is no longer
needed in the case. 	Given that the vast bulk of Counsel’s work
for the estate was for the period prior to when the Court will be
approving the employment of Counsel, these objections by the Bank
are effectively largely sustained. 	The Bank’s concerns about the
source of payments to Counsel is addressed at least initially in
this decision.
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
RIO VALLEY MOTORS COMPANY, LLC
Debtor. 	No. 11-06-11866 SS
ORDER DENYING DEBTOR-IN-POSSESSION’S APPLICATION
TO EMPLOY WILLIAM L. NEEDLER AS CHAPTER 11 COUNSEL
The application of the Debtor-in-Possession (“Debtor” or
“Applicant”) to employ as its chapter 11 counsel William L.
Needler and Associates (“Counsel”) (doc 5), the Rule 2016
statement (doc 6), the amended application and amended Rule 2016
statement (doc 130) and the objection thereto filed by Valley
National Bank (doc 175) 1 came before the Court for a preliminary
hearing on July 2, 2007. 	Having considered the case file and the
presentations of counsel, the Court finds that it should issue a
partial ruling on the rate of compensation but defer ruling on
the employment of Counsel as such.
Background
Debtor, through Counsel, filed its voluntary chapter 11
petition on October 13, 2006 (doc 1). 	On the same day Debtor,
also through Counsel, filed the application to employ Counsel
(doc 5), together with Counsel’s disclosure statement pursuant to
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Page 2 of 	11
§ 329 and Rule 2016 F.R.B.P. 	The application sought approval of
Mr. Needler’s services at the rate of $265 per hour. 	The Rule
2016 statement disclosed that Counsel had received, prior to the
filing of the petition, a retainer of $13,500 comprised of $3,500
from Debtor (“Corporate Funds”) and $10,000 “which were Third
Party Funds from a person not a Creditor”, and that these funds
were a portion of an agreed upon retainer of $25,000 plus the
chapter 11 filing fee of $1,039, so that the Counsel expected a
further deposit of $12,539. 	The answer to question no. 9 of the
Statement of Financial Affairs (“SOFA”) concerning payments for
debt counseling or bankruptcy (doc 47) mostly mirrored this
disclosure, but identified the payor of the $10,000 only as a
“Third Party”.
On March 18, 2007, Counsel filed an amended Rule 2016
statement, which detailed, corrected and supplemented the
original Rule 2016 statement. 	Doc 130. 	The amended statement,
in an attached schedule A, listed payments received by Counsel
prepetition and postpetition which made up the $25,000 retainer
together with the $1,039 filing fee. 	It set out the following
payments:
Payor 	Date of payment 	Amount
Prepetition:
Debtor 	July 31, 2006 	$ 5,000
Olivia Lopez 	October 10, 2006 	$ 3,500
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2 A “Carlos Trujillo” is identified as the “General Sales
Manager”. 	SOFA 3©. 	He is to be distinguished from Rick
Trujillo, who signed the petition as the “president” of the
debtor in possession (doc 1) and who is listed, under the name
Ricardo B. Trujillo, as the “managing member 100%” of the debtor
LLC. 	SOFA 21(b).
3 Schedule A literally lists the last two payments as having
been made in November 2007, an obvious typographical error which
the Court has corrected in the text of this order.
4 Had Counsel complied with the local rules immediately upon
the filing of the application, Counsel would presumably have
learned of the defect in the application early on, corrected it,
and had its employment approved at a much earlier date.
Page 3 of 	11
Carlos Trujillo 2 	October 12, 2006 	$10,000
Postpetition:
Olivia Lopez 	November 1, 2006 3 	$ 5,000
Carlos Trujillo 	November 17, 2006 	$ 2,539
Total 	$26,039
No further action was taken on the application until
Debtor’s local counsel (Walter L. Reardon, who essentially took
over the case in late February 2007 (see doc 119)) sent out a
notice of the filing of and deadline to object to the application
on May 17, 2007. 	Doc 172. 	Valley National Bank timely objected
to the application. 	Doc 175. 	As contemplated by the Court’s
local rules, which put the burden on a party seeking relief
either to submit to the court a form of order evidencing the
consent of all parties in interest or to notice up a deadline for
objections to the relief sought, the filing of the objection led
to the preliminary hearing. 	See NM LBR 9013-1 (Aug. 1996). 4
Discussion
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5 In Jensen v. United States Trustee (In re Smitty’s Truck
Stop, Inc.), 210 B.R. 844, 848 (10 th Cir. B.A.P. 1997) had the
disclosure issue not arisen almost three years after counsel in
that case had been employed, Id. at 847, it may well have been
that the attorney would not have been employed. 	In any event,
Interwest Business provides sufficient support for the
proposition that insufficient financial disclosure is a basis for
not employing a professional. 	Id., at 317.
Page 4 of 	11
Under § 327 an applicant bears the burden of establishing
that the chosen professional meets the requirements of the Code
and the rules. 	Interwest Business Equipment, Inc. v. United
States Trustee (In re Interwest Business Equipment, Inc.), 23
F.3d 311, 318 (10 th Cir. 1994) (It was not an abuse of discretion
to deny counsel’s request to represent as chapter 11 counsel
three related debtors in possession with intercompany claims
against each other.). 	This is done by application and
accompanying affidavits. 	Id.; Rules 2014 and 2016, F.R.B.P.
Sections 327, 328 and 329 are all implicated in the disclosure
process which enables a court to determine whether a professional
should be employed and compensated. 	Id., at 317. 5
The disclosure requirements of § 329 are mandatory, not
permissive. 	Winship v. Cook (In re Cook), 223 B.R. 782, 790
(10 th Cir. B.A.P. 1998), citing In re EWC, Inc., 138 B.R. 276,
280 (Bankr. W.D. Okla. 1992); Jensen v. United States Trustee (In
re Smitty’s Truck Stop, Inc.), 210 B.R. 844, 848 (10 th Cir.
B.A.P. 1997) (Counsel’s failure to disclose source of retainer
resulted in loss of all compensation).
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6 The Court has assumed that the second disclosure is
accurate. 	Consistent with a practice in which virtually all
(continued...)
Page 5 of 	11
Debtor’s counsel must lay bare all its dealings ...
regarding compensation.... 	Counsel’s fee revelations
must be direct and comprehensive. 	Coy, or incomplete
disclosures ... are not sufficient.
Id.. 	(Citations and internal punctuation omitted.) 	A corollary
of that requirement is that an application for employment is not
complete until the requisite disclosure has been made. 	The
failure to file a sufficiently detailed disclosure, even if the
failure is merely negligent or inadvertent, id. at 849, does not
provide the Court and parties in interest the information they
need to judge whether the Code’s standards are being met. 	Id.;
see Interwest Business, 23 F.3d at 317 (“The applications and
accompanying affidavits in this case do not contain specific
facts that would have enabled the court to rule out the
conflicts....”).
[I]t is not the court’s job to search through the
record to find all relevant facts relating to an
attorney’s employment. 	It is counsel’s [or
applicant’s] duty to provide the court with the
information necessary to determine whether to appoint
counsel.
Smitty’s Truck Stop, 210 B.R. at 849. 	(Citations omitted.)
And it should go without saying that the disclosures must be
accurate.
To begin with, Counsel’s initial disclosure was not
accurate. 6 	It listed a total of $13,500, when in fact $18,500
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6(...continued)
these sorts of applications are decided on the papers, the Court
has not conducted a final evidentiary hearing at which Counsel
might be required to produce copies of checks and an accounting.
Page 6 of 	11
had been received. 	In addition, the Debtor paid $5,000, not
$3,500. 	And the $3,500 came from Ms. Lopez, who went completely
unmentioned in the initial disclosure.
In addition, Carlos Trujillo was initially identified only
vaguely as a “Third Party” and “a person not a Creditor”. 	This
is not sufficient. 	The purpose of the disclosure is to allow any
party in interest to make an independent judgment about the
effect on the estate of any given payment. 	A “person not a
Creditor” is too vague a description to allow a party in interest
to make at least an initial determination about the identity of
the payor or the relationship of the payor to the debtor, the
estate or the professional.
It is true that an application ordinarily need not contain a
“biography” of the payors. 	On the other hand, the identity of
these payors and their connection to the debtor, the estate and
Counsel are not immediately obvious, as compared to, for example,
the debtor itself which contributed the Corporate Funds. 	Parties
in interest, including the United States Trustee and creditors,
as well as the Court, ought to be able to know who it is who is
paying the professional without having to conduct a Rule 2004
examination or an evidentiary hearing. 	In this instance Counsel
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7 The oft cited Roberts decision succeeds in its self-
proclaimed mission of comprising a “thorough analysis of the law
of conflicts of interest as it impacts on bankruptcy cases and
proceedings....” 	Id. at 821.
Page 7 of 	11
needs to say who these people are and what their relationship is
to the debtor, to any officers or shareholders of the debtor, or
to Counsel. 	There have been hearings during which Mr. Carlos
Trujillo or Ms. Lopez may have been identified, but that sort of
incidental disclosure clearly is insufficient for employment or
compensation matters.
The concern addressed by this disclosure is that the
“disinterested” requirement of § 327 as defined by § 101(14)(E)
calls for a professional to
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.
See generally In re Roberts, Inc., 46 B.R. 815, 827-29 (Bankr. D.
Utah 1985), aff’d in part, modified in part, and rev’d in part 75
B.R. 402 (D. Utah 1987) (chapter 11 counsel for corporate debtor
in possession denied all fees and reimbursement for failure to
disclose conflicts of interest and lack of disinterestedness). 7
A “person not a Creditor” could mean a person that made a gift to
the debtor by advancing the funds without expecting repayment, or
the phrase could mean a person who only became a creditor by
advancing the funds with an expectation of repayment from the
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8 Neither Olivia Lopez nor Carlos Trujillo is listed on
Schedule F, filed November 13, 2006 (doc 47).
9 For example, in Land v. First National Bank of Alamosa (In
re Land), 943 F.2d 1265 (10 th Cir. 1991), the court found it
significant that the primary contributor of attorney’s fees was
the debtor’s brother, who expected to be repaid from any judgment
entered in favor of the debtor in certain litigation. 	Id. at
1266 (chapter 11 debtor’s attorney required to return fees to
third parties because attorney had failed to obtain court
approval of employment).
Page 8 of 	11
debtor. 	Such a person might or might not be listed on schedule
F8 or might even claim to be an administrative creditor at some
point. 	The phrase could describe a person connected with the
debtor’s owner or manager and whose interests are probably
congruent with management. 	Or it could describe a competitor
with an interest in seeing the debtor in bankruptcy such as, for
example, a rival seeking to purchase the business or assets from
a trustee or seeking to eliminate the debtor as a competitor. 	A
professional accepting payment from any such person might end up
with conflicting loyalties, or perhaps be subject to the payor
seeking “access” to the professional as a result of the payment.
Thus any “interest or relationship that would even faintly color
the independence and impartial attitude required by the Code and
Bankruptcy Rules” needs to be disclosed. 	In re Cook, 223 B.R. at
789. 	(Internal punctuation and citation omitted.) 9 	Each party
in interest, as well as the Court, is entitled to have that
information in order to draw an independent conclusion about the
professional’s loyalties.
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Page 9 of 	11
In addition Olivia Lopez is not identified at all in the
schedules or SOFA or anywhere else in the court file. 	The Court
has no idea from the file who this person is or what her
connection is to the debtor. 	That she was a payor, or had agreed
to be a payor, should have been disclosed no later than fifteen
days after the payment or after the agreement for her to be a
payor. 	Rule 2016(b).
Conclusion and Order:
What this all means is that even now Counsel has not fully
disclosed the source of payments it has received. 	The
consequence of the continuing failure of disclosure is that the
Court cannot approve Counsel’s employment, at least not yet.
IT IS THEREFORE ORDERED that within fifteen days from the
entry of this order Counsel shall file a supplement to the
amended application and Rule 2016 statement (doc 130) and notice
it out to all parties in interest, with a twenty-day deadline to
raise further objections to Counsel’s employment. 	The amendment
shall disclose (1) who Carlos Trujillo and Olivia Lopez are, (2)
what are their relationships to the Debtor, any insider of the
Debtor, or Counsel, and (3) what are the expectations of Carlos
Trujillo and Olivia Lopez concerning repayment of the sums
advanced to Counsel both prepetition and post postpetition. 	If
the additional disclosure does not disclose any conflicts or
other problems for the estate (regardless of whether the Court
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10 If the Court approves the application, it will be at the
rates proposed in the application, except that Counsel will be
allowed to charge no more than $200 per hour for Mr. Needler’s
services. 	Consistent with this Court’s practice, Counsel may
seek approval of a higher rate for Mr. Needler by means of a
further separate hearing to address that issue. 	See this court’s
materials for Year in Review, 2004, ¶1(b), on this Court’s
chambers web page at www.nmcourt.fed.us.
Page 10 of 	11
reaches that conclusion in the absence of a further objection or
after a hearing on any objection), the Court will approve the
employment of Counsel as of the date of the amended disclosure
required by this order. 10 	This order being issued today does not
constitute a ruling one way or the other on the issue of whether
the payment arrangements described herein comply with § 329.
Honorable James S. Starzynski
United States Bankruptcy Judge
copies to:
Christopher J DeLara
PO Box 93880
Albuquerque, NM 87109-3880
Sean E Garrett
Butt Thornton & Baehr PC
4101 Indian School Rd NE, Ste 300S
PO Box 3170
Albuquerque, NM 87190-3170
Duane Geck
Severson & Werson
One Embarcadero Ctr
San Francisco, CA 94111
Donald Cram
Severson & Werson
One Embarcadero Ctr
San Francisco, CA 94111
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Page 11 of 	11
Thomas D Walker
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
William L Needler
555 Skokie Blvd #500
Northbrook, IL 60062
Walter L Reardon, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Alice Nystel Page
PO Box 608
Albuquerque, NM 87103-0608
William F Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
John H. Mueller
PO Box 2939
Tampa, FL 33601
James Jurgens
100 La Salle Cir Ste A
Santa Fe, NM 87505-6976
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