In re ABC Automotive Products Corp.

Decision Date26 June 1997
Docket NumberBankruptcy No. 97-11477DWS.
Citation210 BR 437
CourtU.S. Bankruptcy Court — Eastern District of Pennsylvania

Flamm, Boroff & Bacine, Pace Reich, Conshohocken, PA.

Allen B. Dubroff, Philadelphia, PA, for Debtor.

Ciardi, Maschmeyer & Karalis, P.C., Aris J. Karalis, Philadelphia, PA.

Joseph Minni, Office of the U.S. Trustee, Philadelphia, PA, Trustee.


DIANE WEISS SIGMUND, Bankruptcy Judge.

Before the Court are the Objections of the United States Trustee ("UST") and Ciardi, Maschmeyer & Karalis, P.C. (the "Ciardi Firm") to Flamm, Boroff & Bacine's ("Flamm") Application for Appointment of Counsel to Official Committee of Unsecured Creditors (the "Committee"). The UST contends that the manner of Flamm's engagement evidences a disabling conflict that precludes its representation of the Committee. The Ciardi Firm also challenges the process by which Flamm was engaged. The story follows.


On February 7, 1997, Debtor filed a voluntary petition under Chapter 11. After an organizational meeting, it appeared that there was insufficient interest to form a creditors' committee. The UST filed its statement so stating on February 26, 1997. Exhibit T-2. However, that subsequently changed and a Committee of four creditors was appointed on March 21, 1997. The creditors appointed then were Rebuilders Automotive Supply ("Rebuilders"), Valley Drive Systems, Inc. ("Valley"), Pioneer, Inc. ("Pioneer") and Belmont Automotive Co., Inc. ("Belmont").

While not stated as such, it appears that the changed interest resulted initially from the activity of Peter Carrigan, a workout specialist/liquidator who operates his own consulting firm curiously titled Hawk Management. Learning of the bankruptcy and identifying Valley's creditor interest, he contacted Valley who in turn contacted Pioneer with the objective of having both submit responses to the UST questionnaire of their interest in serving on the Committee. Their change of heart presumably came from Carrigan's offer to represent their interests on the Committee at no direct charge but rather a percentage based on the ultimate recovery in the case. While advising them that he would contact them for decisions, he nonetheless secured a power of attorney from each. On March 21 he learned from Pioneer that the Committee had been appointed, and thereafter he reached out to the other two members to get the Committee functioning and counsel selected. He reached Rebuilders but not Belmont. In what he characterized as a Committee meeting, actually a telephone conversation with Mr. Grady of Rebuilders, he was selected as Chair of the Committee based on his proximity to the Court and the time he had available for the job. Grady also had no problem with Carrigan soliciting the Ciardi Firm based on his representation from prior experience of its expertise in these matters. Ciardi was interested and accepted the engagement offered by Carrigan.

Contemporaneously Pace Reich, Esquire ("Reich") of the Flamm Firm was taking steps to secure the Committee counsel job for his firm. A former mentor of Debtor's counsel, Alan Dubroff, Reich was the person identified by Debtor's President David Perlman to trade creditors who asked, upon learning of the bankruptcy filing, "what do I do next'?" As a result, Reich was called by nine of the creditors on the twenty largest creditors list. After some preliminary explanation of the activities of a Committee, they were asked if they desired Flamm to act as counsel to the Committee. The telephone call was followed up with the transmittal of a form proxy which Reich states he has used with apparent success and no complaint for years. Exhibits A-I through A-6. The form of the proxy is central to this dispute:

NAME one of the twenty (20) largest Unsecured Creditors of ABC Automotive Products Corp. appoints the firm of Flamm, Boroff & Bacine, P.C. as its proxy for the limited purpose of participating on its behalf at a meeting of creditors. Flamm, Boroff & Bacine, P.C. shall have the authority to vote on behalf of name at the meeting on all matters that may come before the creditors at that meeting, including the retention of professionals for any committee of unsecured creditors that may be formed. Flamm, Boroff & Bacine, P.C. will participate on behalf of name as a member of the Committee of Unsecured Creditors.

Six proxies, dated from February 17 to February 27, were returned to Reich who was also taking steps to get the UST to appoint a Committee which would include the persons from whom he had secured proxies. Exhibit A-7.1 His efforts bore fruit on April 16, 1997 when the UST amended the appointment of the Committee to include three new members, Local 365, United Auto Workers Union ("Local 365"), Regina Services Corp. ("Regina") and A & B. Reich holds proxies of four of the seven members: Belmont, Regina, Rebuilders and A & B. Ciardi was supported by Carrigan's two clients, Valley and Pioneer, and Rebuilders who also gave a proxy to Reich.

After receipt of the Amended Appointment dated April 16, Reich faxed letters, Exhibit A-9, between 3:30 and 4:30 p.m. On April 17, 1997 to all members of the Committee advising them of the Amended Appointment, his holding four of the seven proxies (but not from whom) and his intention to convene a meeting of the Committee at 2:00 p.m. on Friday, April 18 at his law office in Conshohocken "for the sole purpose of appointing a chairman and appointing counsel to the Committee." Members were advised that they could be present by proxy, by telephone conference, if they so request, or in person. He then states:

It is my intent to exercise the proxies held by our firm to vote in favor of appointing Charles Gibbons the representative of Local 365 United Auto Workers Union as chairman. The Union is the largest creditor sitting on the Official Committee and Mr. Gibbons has, subject to approval by his counsel, consented to serve as chairman. It is also my intent to vote such proxies to appoint the firm of Flamm, Boroff & Bacine as counsel to the Committee and to revoke the appointment of any other purported counsel to the Committee.

Finally, he advises that if anyone objects to the above procedure, he should be informed in writing, and if the respondent is any one other than a person named on the Amended Appointment, a proxy signed by the named person should be enclosed. A copy of this letter shows as being telecopied to Dubroff and Ciardi. Reich acknowledged that neither was sent due to an oversight on the part of his secretary.

Hearing nothing from any of the members, Reich convened his meeting at 2:00 p.m. Only he was physically present. The business is transcribed in minutes he then prepared. Exhibit T-9. As proxy for Regina, he nominated Charles Gibbons, the representative of Local 365 as Committee Chair "subject to approval by Mr. Gibbons' attorney as to Mr. Gibbons serving as chairman of the Committee."2 As proxy for A & B, he seconded the nomination. On behalf of all his proxies, he then cast four votes in favor of the appointment. The scenario was repeated with the next motion moved, seconded and voted by Reich using the various proxies. As a result Flamm was appointed Committee counsel and "any other, or previous, appointment of counsel by the Committee, if any such occurred, by the four members originally appointed pursuant to the Appointment of Committee of Unsecured Creditors dated March 21, 1997" was revoked. Thus, with his proxies, Reich claims to have rendered the Ciardi appointment history.3

On April 30, 1997, almost two weeks after the election by proxy, the Committee filed its Application to be employed. The Application once again was moved and executed by Reich, in this case as proxy for Regina. Acknowledging that it is customary for the Chair of the Committee to submit the Application on behalf of the Committee, Reich testified that Gibbons, while asked to do so, refused, on advice of counsel, as "he did not want to become involved." Reich did not state whether Regina was aware that it had made the Application, a copy of which was sent to the UST, Debtor and Debtor's counsel. Neither the Chair of the Committee nor any member were served with the Application nor the notice of hearing. On the other hand, the UST has served her Objection on all interested parties, including each member of the Committee. The Ciardi Objection was served on most interested parties, omitting service of three members of the Committee, Local 365, Regina and A & B. Whether the Committee members were aware of the hearing is not clear. Only Carrigan as representative of Valley and Rebuilders appeared. Since the Application was filed, Reich has not had any contact with any member of the Committee in connection with the Application or otherwise.

The UST objects to Flamm's retention because of her belief that Flamm, by virtue of the proxies it holds, is unable to act as both a member of the Committee and its counsel. Reich responds that notwithstanding the broad language of the proxies, it is not his practice to utilize them for any purpose other than for selection of a Chair and Committee counsel and to act on emergency matters at the first meeting of creditors. Rather he states that he seeks the members' consents to Committee action by polling the members by telephone.4 Presumably then it would not be his intention to use the proxies any further in this case.5 Yet even if Flamm's retention is conditioned on his not using the proxies to make decisions properly made by the members, the UST urges the Application be denied because in formulating and implementing the method of selecting Committee counsel, Flamm placed its interests ahead of those of the Committee and unsecured creditor body by denying them effective participation in the selection of their counsel. Ciardi's objection likewise goes to the lack of notice and absence of creditor participation in the...

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