In re The Leslie Fay Companies, Inc.

In January 1993, the board of directors of The Leslie Fay Companies, Inc. (Leslie Fay) (debtor) directed an audit committee to investigate potential accounting fraud at the company. The audit committee hired Weil, Gotshal & Manges (Weil) as counsel. In February 1993, the audit committee announced that Leslie Fay had fraudulently overstated its 1991 profits. Following that announcement, Leslie Fay’s lenders and suppliers froze its credit lines, and Leslie Fay experienced significant financial difficulties culminating in a Chapter 11 bankruptcy filing in April 1993. The bankruptcy judge approved Weil’s request to serve as counsel for Leslie Fay as debtor-in-possession while continuing to work for the audit committee. The audit committee eventually concluded that there had been significant financial fraud at Leslie Fay but that none of Leslie Fay’s then-current board or senior management had participated in the fraud. However, Leslie Fay’s unsecured-creditors’ committee and the United States trustee began raising concerns about whether Weil was disinterested as required by 11 U.S.C. § 327(a) and whether Weil had fully disclosed its connections with creditors or other interested parties as required by Federal Rule of Bankruptcy Procedure 2014. The bankruptcy court appointed Charles Stillman to examine Weil’s alleged conflicts. Stillman found that Weil had failed to disclose that certain potential targets of the audit committee’s investigation were senior employees of important Weil clients. Weil had also failed to disclose that Leslie Fay’s independent auditor and seventh largest creditor were also Weil clients. Stillman concluded that Weil was not disinterested and had not properly disclosed its relationships. The trustee moved to disqualify Weil from serving as Leslie Fay’s counsel and for monetary sanctions.