In re Brennan

• Citation: 187 BR 135
• Decision Date: 29 September 1995
• Docket Number: Bankruptcy No. 95-35502,95-35503.
• Parties: In re Robert E. BRENNAN, Debtor. In re FIRST JERSEY SECURITIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of New Jersey

187 B.R. 135 (1995)

In re Robert E. BRENNAN, Debtor.

In re FIRST JERSEY SECURITIES, INC., Debtor.

Bankruptcy Nos. 95-35502, 95-35503.

United States Bankruptcy Court, D. New Jersey.

September 29, 1995.

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Gerald H. Gline, Cole, Schotz, Meisel, Forman & Leonard, Hackensack, NJ, for Robert E. Brennan.

Walter J. Greenhalgh, Mary Ann Dubiel, Robinson, St. John & Wayne, Newark, NJ, for First Jersey Securities, Inc.

Patrick W. Turner, Susan Jensen-Conklin, Newark, NJ, for U.S. Trustee.

Judith R. Starr, John L. Hunter, Washington, DC, Suzanne R. Dyer, U.S. Attorney's Office, Newark, NJ, for Securities and Exchange Commission.

James B. McKinney, Jr., Deputy Attorney General, Department of Law and Public Safety, Newark, NJ, for New Jersey Bureau of Securities.

James Scarpone, Hellring, Lindeman, Goldstein & Siegal, Newark, NJ, for Creditors Committee in Brennan Case.

Charles F. Vihon, Much, Shelist, Freed, Denenberg & Ament, P.C., Chicago, IL, for N.J. Class Action (Hibbard Brown).

Daniel E. Bacine, Barrack, Radius & Bacine, Philadelphia, PA, for Barrack, Radius & Bacine.

Joel Sterns, Jeffrey Posta, Sterns & Weinroth, P.C., Trenton, NJ, for Sterns & Weinroth, P.C.

Lawrence A. Whipple, Jr., Connell, Foley & Geiser, Roseland, NJ, for Seton Hall University.

MEMORANDUM OPINION

STEPHEN A. STRIPP, Bankruptcy Judge.

This is the court's decision on applications by the debtors-in-possession in both of the above cases to employ Mortenson & Associates, P.C., as accountants, and by First Jersey Securities, Inc. to employ Robinson, St. John & Wayne as its attorneys.¹ The United States trustee and the Securities and Exchange Commission objected on the grounds that these professionals have conflicts of interest which preclude their employment by the debtors-in-possession. The New Jersey Bureau of Securities joined in the objection to the retention of Mortenson & Associates, P.C. This court has subject matter jurisdiction under 28 U.S.C. §§ 1334(b), 151 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). For the reasons which follow, the objections are overruled and the applications are granted. This shall constitute the court's findings of fact and conclusions of law.

FINDINGS OF FACT

These cases were commenced by the filing on August 7, 1995 of voluntary petitions for relief under chapter 11 of title 11, United States Code (hereinafter "Bankruptcy Code" or "Code"). Debtor Robert E. Brennan (hereinafter "Brennan") described his business in his petition as owner, operator and chief executive of various businesses engaged in the horse racing or breeding industry. In addition, Brennan manages his personal investments and performs business consulting services. The schedules filed with Brennan's bankruptcy petition state that he owns assets with a value of $90,110,156, and has liabilities of $85,640,452.

Debtor First Jersey Securities, Inc. (hereinafter "First Jersey") stated in its petition that it was previously a registered broker/dealer, but is presently inactive. The schedules filed with First Jersey's bankruptcy petition state that it has assets with a value of $22,367, and liabilities of $75,314,145. Brennan owns 100% of the stock of First Jersey.

The primary liability of the debtors is the judgment against them jointly and severally in favor of the Securities and Exchange Commission (hereinafter "SEC") for $75,000,000 for perpetrating a fraud on their brokerage customers. The pendency of a deadline to pay that judgment, which was entered in the U.S. District Court for the Southern District of New York, was the reason for the filing of the bankruptcy petitions. The debtors are appealing the judgment to the U.S. Court of Appeals for the Second Circuit.

The Applications to Employ Mortenson & Associates

Both debtors filed applications to employ Mortenson and Associates, P.C. (hereinafter "Mortenson") to render accounting services. The affidavits of Robert J. Weir (hereinafter "Weir") in support of both applications note that Mortenson provides accounting services to both debtors. Weir's affidavit in support of the application to employ Mortenson in the Brennan case also states in paragraph 4 that

as general accountants to the Debtor, Mortenson also provides accounting services to various other entities in which the Debtor retains an interest. To the best of my knowledge, those entities do not hold or represent an adverse interest to the estate.

Both affidavits also state that to the best of Weir's knowledge, Mortenson does not hold or represent an interest adverse to either estate and is a disinterested person within the meaning of Bankruptcy Code section 327.

The U.S. trustee objected to both applications, asserting that (1) insufficient information was provided in the applications to determine whether Mortenson represents an interest adverse to either estate and is a disinterested person within the meaning of Bankruptcy Code sections 327(a) and 101(14); (2) the simultaneous representation of both debtors may present a conflict of interest in violation of Code section 327(a), in part because the schedules disclose eight creditors which the debtors have in common; and (3) the simultaneous representation of Brennan and the "various other entities" referred to by Weir as quoted above may present a conflict of interest in violation of Code section 327(a).

The SEC joined the U.S. trustee's objections, and added that the SEC's pending motions for appointment of a trustee in these cases may moot the need for consideration of the applications. The motions for appointment of a trustee have since been resolved by entry of consent orders directing the appointment of an examiner under Code section 1104 in the Brennan case. The examiner will also investigate the financial affairs of First Jersey.

The court conducted a telephonic conference on August 15, 1995 to set a schedule for the filing of further papers on these objections and a hearing on August 24, 1995.

A supplemental certification was then filed in the Brennan case by Dennis Gaito (hereinafter "Gaito"), a principal in Mortenson, listing nine entities owned by Brennan to which Mortenson provides accounting services, including First Jersey. Gaito's affidavit states that he is also a co-trustee for three separate trusts in which Brennan's children, but not Brennan, have beneficial interests. Gaito's affidavit also states that Mortenson provides accounting services to a "PAB Trust" from which Brennan leases property. The affidavit adds further that Mortenson is the auditor for two public companies in which Brennan owns stock, namely International Thoroughbred Breeders, Inc. and Chef's International, Inc. Mortenson is also auditor for Primedex Health Systems, Inc., certain shares of which Brennan sold on June 5, 1995. Brennan has a note receivable in the amount of $700,000 from a third party who purchased the stock. Gaito's certification concludes in paragraph 6 that

it is important to emphasize to the Court that none of the related entities set forth above are creditors of the Debtor or owe money to the Debtor. In addition, the Debtor is not owed any money by First Jersey and First Jersey owes no money to the Debtor.

First Jersey adopted the Gaito certification filed in the Brennan case in support of the application to employ Mortenson in First Jersey as well.

The SEC argued in reply that the Gaito certification leaves many questions unanswered concerning Mortenson's representation of entities whose interests appear to the SEC to be adverse to the debtors, and Mortenson's involvement in transactions that the SEC believes may compromise Mortenson's ability to exercise independent judgment on behalf of the estates. The SEC then lists a number of relationships and transactions which it believes require close scrutiny, with which Mortenson has been involved.

The hearing on these objections commenced on August 24, 1995. At a point more than three hours into a four-hour hearing, when the court had commenced rendering a ruling from the bench on the objections, a Deputy Attorney General representing the New Jersey Bureau of Securities (hereinafter "Bureau of Securities") interrupted the ruling and blurted out that the Bureau of Securities also opposes the applications to employ Mortenson because Mortenson was involved in transactions in which Brennan transferred $16,750,000 to Swiss bank accounts. The Bureau of Securities had not filed any opposition to the applications or informed anyone until the court commenced its ruling that it opposed the applications. The debtors' attorneys vehemently objected to the timing of the Bureau of Securities' statement, as did the court. The Deputy Attorney General replied that the subject information had been under seal in state court proceedings until several days earlier. While that fact did not explain or justify waiting until the court commenced its ruling to raise the objection, the factual allegations were sufficiently serious to warrant an adjournment of the hearing to require the Bureau of Securities to put their allegations in writing, and to give the other parties an opportunity to respond. The hearing was therefore adjourned to August 30, 1995. Thereafter, the Bureau of Securities filed an objection stating, without explanation or elaboration, that "Dennis Gaito, an accountant and principal in Mortenson & Company, a/k/a/ Mortenson and Associates, authorized and participated in transfers which resulted in $13,750,000 and $3,000,000 of funds of entities in which debtor Robert E. Brennan has an interest being moved out of this country." The Bureau of Securities relied on annexed documentary exhibits to support this allegation.

Papers filed in opposition by Brennan include a certification of the debtor that the transfers in question were on behalf of two trusts which Brennan established as part of...