In re Mortg. & Realty Trust
| Decision Date | 29 April 1996 |
| Docket Number | Bankruptcy No. LA 95-31101. Adv. No. 95-05861. |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re MORTGAGE & REALTY TRUST, Debtor. VALUE PROPERTY TRUST, Plaintiff, v. ZIM CO., Defendant. |
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Bennett Murphy of Latham & Watkins, Los Angeles, CA, for Value Property Trust.
Lloyd A. Palans and Kevin M. Abel of Bryan Cave L.L.P., St. Louis, MO, and John W. Amberg and Robert E. Boone, III of Bryan Cave L.L.P., Los Angeles, CA, for Zim Co.
OPINION DISQUALIFYING BRYAN CAVE AS COUNSEL FOR DEFENDANT
The reorganized debtor in this case, which has brought this adversary proceeding to cancel a purported contract with defendant Zim Co. ("Zim"), moves this Court to disqualify Zim's counsel of record, Bryan Cave. The Court holds that Bryan Cave must be disqualified, because one of its lawyers served on the debtor's board of trustees when the transaction here at issue was considered by the board. The Court finds that the fiduciary duty of loyalty of the trustee continues after his resignation from the board (which happened on the effective date of the reorganization plan), with respect to matters considered by the board of trustees while he was a member, and that these duties conflict with those owing by the trustee's law firm as counsel for the defendant. The Court further holds that this conflict of interest of the trustee is imputed to the law firm, and requires its disqualification.
This case illustrates the requirement that a conflict of interest held by one attorney in a law firm normally extends to the entire firm, no matter how large. In such a circumstance, if the conflict requires the disqualification of that attorney, the entire firm must be disqualified, including all attorneys in all offices of the firm.
II. FACTS
Mortgage & Realty Trust ("MRT"), a real estate investment trust ("REIT")1 organized under the laws of the State of Maryland, filed this chapter 11 bankruptcy case on August 18, 1995. At the same time that MRT filed this case, it filed a prepackaged plan of reorganization, for which it had already solicited acceptances pursuant to a prospectus under § 12 of the Securities Exchange Act of 1934, 15 U.S.C.A. §§ 78l (1981 & Supp.1995). Five weeks later the Court confirmed the plan of reorganization on September 22, 1995. This is MRT's second chapter 11 case: it previously filed a chapter 11 case in this Court on April 10, 1990, and the Court confirmed the prior plan of reorganization on February 21, 1991.
MRT's reorganization plan in this case essentially provided that the debtor would continue in its REIT business, but that a substantial portion of its debt would be converted into equity. This new equity constitutes approximately 98% of the present equity in the debtor. While the old shareholders continue to hold their shares, they have been diluted to some two percent of the outstanding equity.
After confirmation of the plan, MRT filed articles of amendment and restatement of its charter, which made two changes in the charter. First, the amendment changed the name of the debtor to Value Property Trust ("VPT"). Second, the amendment substituted new trustees and officers for those who previously held office. No other changes have been made in the charter.
MRT was governed by a board of trustees, and Jeffrey M. Bucher served as a member of the board from 1979 until the effective date of MRT's reorganization plan on September 29, 1995. For at least the last nine years, he has been the only attorney serving on the seven-member board. The Court has seen no evidence that Bucher has ever served as legal counsel for MRT. MRT has had no in-house legal counsel, and its outside counsel until recently was Morgan, Lewis & Bockius. Bucher received more than $85,000 in compensation for his service for his final three years on the board (including his distribution from MRT's pension plan), which he did not share with his law firm. He resigned his position, as required by MRT's plan of reorganization, on September 29, 1995, the effective date of the plan.
Bucher has been of counsel to the Washington, D.C. office of Bryan Cave since 1993. He is licensed to practice law in both the District of Columbia and California. Bryan Cave has never represented MRT.
Bryan Cave is legal counsel for defendant Zim in this adversary proceeding, as well as in related litigation pending in state court in Missouri. Bryan Cave is a firm of approximately 400 attorneys2 that is headquartered in St. Louis, Missouri, and has offices in nine cities in the United States and in seven foreign countries.3 This litigation, as well as the related state court litigation in Missouri, is handled by attorneys in its St. Louis office.
On August 14, 1995, four days before this bankruptcy case was filed, MRT's board of trustees considered a contract with Zim to sell Zim its Villa del Cresta Apartments in Florissant, Missouri, a suburb of St. Louis, for $9.8 million. At the same meeting MRT's board of trustees approved the filing of this bankruptcy case. Bucher was present during the deliberations concerning the Zim contract, and he voted in favor of it. Apparently, however, he presently has no memory of the discussion on this subject at the meeting.
On August 22, 1986, four days after this bankruptcy case was filed, MRT signed a contract of sale for the apartment complex, and Zim signed the contract on August 24, 1995. No court authorization for this contract was ever sought.
The plan of reorganization gave VPT a 90-day window after confirmation to avoid any postpetition transfers. VPT timely field this adversary proceeding to set aside the sale to Zim, on the grounds that it was a postpetition transaction that was unauthorized because it lacked court approval. At approximately the same time, Zim filed a state court action in Missouri seeking to enforce its alleged contract with VTP. The principal issue raised by the complaint in this adversary proceeding is whether the contract is binding on VPT, in view of the fact that the contract was signed while the bankruptcy case was pending, and no court authorization was ever sought or obtained.
Zim is represented in both this litigation and the Missouri state court litigation (which has since been removed to the federal district court) by Bryan Cave, the very law firm where Bucher practices. VPT has challenged Bryan Cave's representation of Zim with this motion to disqualify it as counsel.
III. DISCUSSION
Attorneys have served as directors of corporations for many years, probably more than a century. One would have expected a plethora of reported decisions on the issue on whether such service creates a conflict of interest for the attorney's law firm in representing a client opposing the corporation with respect to a decision made while the attorney was a director. However, the Court has found very few relevant reported decisions.
Before addressing the merits, the Court must consider two preliminary matters: does VPT have standing to bring this motion, and which jurisdiction's standards of professional conduct apply to this motion, pursuant to the applicable choice of law rules.
Zim argues that VPT lacks standing to bring this motion, because it is a different entity from that in which Bucher was a member of the board of trustees. Zim contends that a post-confirmation amendment and restatement of MRT's charter made it a new and different entity, that lacks sufficient continuity with MRT to support this motion.
Zim argues that VPT as successor to MRT lacks standing to bring this motion, and relies on Nissen Corp. v. Miller, 323 Md. 613, 594 A.2d 564 (1991), in support of its position. However, this is not a case of successor liability, and Nissen provides Zim no support. Nissen involved the sale of assets from one entity to another, and the question of whether a product liability case could be brought against the successor corporation. In contrast, this case does not involve the liability of a different entity, that acquired assets from an entity that might otherwise be liable on a claim.
After the confirmation of the plan, MRT amended and restated its charter. However, the amendment accomplished only two changes, both of which were quite minor: (1) MRT changed its name to VPT, and (2) it appointed new management and trustees. MRT did not sell its assets to another entity or liquidate them: it remains intact. Furthermore, almost all of the shareholders in VPT were creditors of MRT, and became shareholders because the chapter 11 plan converted a portion of their debt into stock.
VPT is the same entity, for purposes relevant to this motion, that filed this bankruptcy case under the name of MRT. In addition, its shareholders are the very creditors to whom Bucher owed his fiduciary duties as a trustee of MRT (after its insolvency), and to whom he still owes certain fiduciary duties as a former trustee. These fiduciary duties are inconsistent with his (or his firm's) representation of Zim in this adversary proceeding. Thus VPT has standing to bring this motion.
The determination of the governing standards of professional conduct in this case is complicated by the multiplicity of jurisdictions relevant to this analysis. There is no unified set of standards for professional conduct for United States lawyers: they are governed by the standards adopted in the various states where they are licensed and where they practice law.
Bucher, whose conduct is at issue in this motion, is licensed to practice both in California and in the District of Columbia, and actually practices in the District of Columbia office of Bryan Cave. Litigation counsel for Zim in this case is based in Bryan Cave's St. Louis office, and is admitted to practice in that state.4 This Court has admitted...
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