The United States Bankruptcy Code establishes a federal framework that balances two primary objectives: giving financially distressed debtors a meaningful opportunity for a fresh start and protecting the collective interests of creditors by maximizing estate value and ensuring orderly, fair distribution of assets.  In principle, those interests are compatible.  In practice, those two interests compete.  To balance the two, the system relies upon and mandates transparency among its participants, including the professionals who are retained by the bankruptcy estate.   Transparency about professionals’ relationships is central to preserving confidence in the administration of bankruptcy cases. In recent years, private equity (PE) firms have been acquiring advisory, accounting, and financial services firms, concentrating ownership and often creating layered relationships between advisors, portfolio companies, lenders, and sponsors. That consolidation increases the risk that a retained professional will have indirect business ties to parties in interest, making robust Bankruptcy Rule 2014 disclosures more important than ever. 

Bankruptcy Rule 2014: The Disclosure Mandate 

Bankruptcy Rule 2014 requires a verified application for employment that states specific facts showing the necessity of the employment, the identity of the person to be employed, the services to be rendered, proposed compensation, and all the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the U.S. Trustee, or any person employed in the Office of the U.S. Trustee. Notably, the rules are silent on the definition of what constitutes a connection.   

The role of the U.S. trustee 

While any party may challenge the sufficiency of a professional’s disclosures or object to its retention due to potential or actual conflicts, it is most often the U.S. Trustee that raises such concerns.  The Office of the U.S. Trustee has stated that it considers two primary factors when determining whether a third-party investment must be disclosed: knowledge and control. If the professional firm seeking employment knew or could have known about an investment in a particular entity that may be involved in the case, then the U.S. Trustee believes the investment should be disclosed. If the professional firm controlled or could have controlled the selection of an investment, then it is the U.S. Trustee’s position that the investment must be disclosed. 

Consequences of non-disclosure 

Financial advisors, investment bankers, and attorneys are held to the same disclosure standards in bankruptcy cases. Failure to disclose connections can result in fee disgorgement (i.e., the return of compensation), disqualification from serving as estate professionals, and reputational harm that limits future engagements. Regulators like the SEC may also impose penalties outside bankruptcy court when advisors fail to disclose conflicts tied to compensation or client relationships. 

Defining ‘connections’: A persistent challenge 

Recent high-profile litigation and court decisions have put a spotlight on the complexity of defining ‘connections’, but that additional scrutiny has only borne more imprecision.  For example, in In re Fibermark, the Court, which readily acknowledged the unfortunate nature of the bankruptcy rules drafters’ decision to include the term connections, characterized the cross motions for summary judgment before it as “test[ing] the limits of the obligation of professionals to disclose ‘all connections.’” In that case, the Court concluded: 

“Rule 2014 does require professionals appointed in chapter 11 cases to disclose all connections with the debtor, creditors, any other party in interest, as well as the attorneys and accountants for such parties. However, the extent and format of such disclosures may vary from case to case, as the circumstances of each case will define the ‘connections’ that must be disclosed to provide the Court and parties in interest with sufficient information to determine whether the applicant is disinterested. Moreover, any determination of the sufficiency of the disclosures produced pursuant to Rule 2014 should be made by balancing the plain language of the rule's mandate that applicants disclose ‘all connections,’ in order to maintain integrity of the professional appointment process in bankruptcy cases, against the common sense analysis of what connections are reasonably defined as pertinent to the ultimate question of disinterestedness, so that competent professionals do not find the requirements of representing parties in bankruptcy cases so burdensome as to deter them from doing so.”

This case illustrates the relative subjectiveness of defining connections, balancing the need for robust disclosure and the court’s role in determining whether such connections give rise to a conflict of interest with the practical implications related thereto. Other courts, when faced with this issue, have similarly offered little clarity. This lack of clarity has seemingly led to a continuation of the industry’s ad-hoc approach to disclosure (meaning some firms disclose nothing by saying little, and other firms disclose nothing by saying too much).  

Private equity’s growing influence 

In the last few years, private equity has rapidly consolidated the advisory and accounting sector: large sponsors have completed high‑visibility transactions and backed multi‑firm recapitalizations. Additionally, dozens of middle‑market and national firms have accepted PE capital or are in active talks to do so. Industry trackers show global PE and venture capital (VC) deal value in accounting, auditing, taxation, and related professional services reached over $6.3 billion in 2024 alone, and deal counts hit multi‑year highs (roughly two dozen reported transactions). Reports estimate that at least $2 billion has been infused into public accounting firms over the past three years – illustrating both the scale and speed of the PE wave. 

Why PE ownership complicates disclosures 

Private equity firms, by design, have numerous, diversified, and ever-evolving portfolios. When private equity firms acquire advisory firms, that advisory firm may simultaneously be positioned to provide services to its PE owner, lenders, or other portfolio companies, or receive referral business tied to the sponsor’s network. However, potentially unbeknownst to the acquiring firm, the nexus of potential connections to a debtor or other party in interest expands and may inadvertently trigger an undisclosed connection, or even a conflict, merely through institutional ownership.  

Best practices for firms in the PE era 

To evolve in the private equity era, firms and their sponsors should develop best practices to avoid potential issues. Those practices may include: 

• Firms should establish a framework for reviewing and investigating potential connections. Firm relationship should be documented, organized, and reviewed prior to the preparation of a retention application. 
• All connections with parties in interest, however remote, must be disclosed; nondisclosure erodes trust and can result in sanctions, disgorgement, or denial of fees. 
• Direct and indirect relationships include prior engagements, equity holdings, board roles, related party transactions, and material commercial ties through affiliates or common owners.
• Private equity ties must be treated carefully; disclose investments by PE firms in the advisor itself, common ownership of other professionals, or prior advisory work for a sponsor or its portfolio companies. 

Continuous compliance: Beyond initial retention 

Moreover, the Bankruptcy Rules mandate that the need for disclosure does not end after retention. In the private equity era, continued measures should be taken to ensure no new connections arise during the duration of a case: 

• Ongoing supplementation: promptly amend disclosures if new connections arise during the engagement. 
• Conflict mitigation: where ties exist, propose concrete screening measures, disclosure to creditors, or limited scope engagements, and let the court rule on whether employment is in the estate’s best interest. 
• Document retention: preserve engagement histories and conflict searches to support the verified statement and any later inquiries. 

Reinforcing integrity through disclosure 

In conclusion, Rule 2014’s disclosure mandate is not a pro forma filing; it is the principal safeguard against hidden ties that can compromise impartiality. Given the surge of private equity investments into advisory and accounting platforms, professional firms and their practitioners must treat disclosure with renewed rigor to get ahead of an inadvertent non-disclosure.  Thoughtful, specific, thorough, and promptly supplemented disclosures enable informed judicial oversight, protects the integrity of the bankruptcy process, and prevents the economic loss and public embarrassment that results from helping to define the term ‘connection.’