In re Caldor, Inc.-NY

• Citation: 193 BR 165
• Decision Date: 27 February 1996
• Docket Number: Bankruptcy No. 95-B-44030.
• Parties: In re CALDOR, INC. — NY, The Caldor Corporation, Caldor, Inc. — CT, et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

193 B.R. 165 (1996)

In re CALDOR, INC. — NY, The Caldor Corporation, Caldor, Inc. — CT, et al., Debtors.

Bankruptcy No. 95-B-44030.

United States Bankruptcy Court, S.D. New York.

February 27, 1996.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Otterbourg, Steindler, Houston & Rosen, P.C., New York City, pro se.

Proskauer Rose Goetz & Mendelsohn L.L.P., Marguerette N. Hosbach, New York City, for Ernst & Young L.L.P.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for debtor.

Zalkin, Rodin & Goodman, New York City, for Chemical Bank as Agent for Pre-Petition Secured Lenders.

MEMORANDUM DECISION ON OBJECTION BY UNITED STATES TRUSTEE TO THE PROPOSED RETENTION OF OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C., AND ERNST & YOUNG LLP AS COUNSEL AND ACCOUNTANTS AND FINANCIAL ADVISORS, RESPECTIVELY, TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS

JAMES L. GARRITY, Jr., Bankruptcy Judge.

Bradlees and Caldor (as those terms are defined below) are mid-to high-end discount retail merchandisers with chapter 11 cases pending in this court. By court order, Bradlees' Official Committee of Unsecured Creditors (the "Bradlees Committee") retained Otterbourg, Steindler, Houston & Rosen, P.C. ("Otterbourg"), as its counsel and Ernst & Young LLP ("Ernst", with "Otterbourg" collectively to be referred to as the "Professionals"), as its accountants and financial advisors. Caldor's Official Committee of Unsecured Creditors (the "Caldor Committee", with the Bradlees Committee collectively to be referred to as the "Committees") has moved pursuant to § 1103 of the Bankruptcy Code (the "Code") for leave to retain the Professionals in these cases. The United States Trustee (the "Trustee") objects to the motion alleging that the proposed retention is barred under § 1103(b) because the Committees are adverse to one another inasmuch as Bradlees and Caldor are competitors. The Trustee advocates that position notwithstanding that three members of the Bradlees Committee presently sit on the Caldor Committee and Bradlees and Caldor have retained the same accountants, all without objection by the Trustee. For the reasons stated herein the Trustee's objection is overruled, and the Committee is authorized to retain the Professionals.¹

Facts

Except as otherwise noted, the facts herein are taken from a stipulation among the Professionals and Trustee. On June 25, 1995, Bradlees Corp. and certain affiliated companies (collectively, "Bradlees") filed separate petitions under chapter 11 of the Code in this district. Pursuant to §§ 1107 and 1108 of the Code, Bradlees has continued in possession and control of its business and assets as a debtor in possession. On July 6, 1995, after the initial meeting of creditors, the Trustee appointed the Bradlees Committee. By court orders (Lifland, C.J.) dated July 17, 1995 and August 15, 1995, respectively, the Bradlees Committee retained Otterbourg as its counsel and Ernst as its accountants and financial advisors.

On September 18, 1995, Caldor Corporation and 21 affiliated corporations (collectively, "Caldor") filed separate petitions for relief under chapter 11 of the Code in this district. On September 27, 1995, immediately after the initial meeting of Caldor creditors, the Trustee appointed the Caldor Committee. As empaneled, four members of the Caldor Committee also served as members of the Bradlees Committee: Mattel Toys, VF Corporation, American Credit Indemnity and United Food & Commercial Workers. On or about November 6, 1995, VF Corporation resigned from the Caldor Committee. See Affidavit of Kurt J. Wolff sworn to on December 7, 1995, and submitted in opposition to the Trustee's objection, ¶ 13. At the initial creditors meeting, and in the presence of representatives of the Trustee, Caldor advised Caldor Committee members that it had no objection to membership overlaps with the Bradlees Committee or to the selection in this case of professionals who might represent the Bradlees Committee. As the docket in each case reflects, on the consent of the Trustee, both debtors have retained Deloitte & Touche LLP to serve as their accountants. At the initial meeting, the Caldor Committee selected Otterbourg as its counsel following interviews of, and presentations by, eight law firms. Prior to its selection, Otterbourg disclosed orally and in writing its representation of the Bradlees Committee. The Caldor Committee solicited proposals from Ernst and three other firms to serve as its accountants and financial advisors. Ernst submitted a Proposal to Serve which outlined its qualifications and experience in the field of retail restructuring, and disclosed its engagement by the Bradlees Committee, as well as certain other retailers. The Caldor Committee selected Ernst after interviewing each of the solicited firms. During its interview Ernst again disclosed its representation of the Bradlees Committee. Ernst also advised that, if retained in this case, it would staff the case with personnel having no connection with the Bradlees case. As of the commencement of the Caldor case it instituted an "information barrier" shielding the Ernst personnel slated to work on the Caldor case from any Bradlees matters. After concluding its interviews, the Caldor Committee selected Ernst. Since that time, at Caldor's request, Otterbourg, Ernst and each committee member have executed confidentiality stipulations.

The Trustee objects to the Professionals' retention. The Caldor Committee has been provided with copies of that objection and has reaffirmed its application to retain them. It believes that its functioning will be substantially harmed if it is not permitted to be served by the Professionals. Caldor supports the committee, maintaining that if the Trustee's objection is sustained the chapter 11 cases will be disrupted resulting in unwarranted delay in the reorganization process. The pre-petition bank group also supports the committee contending that a change of professionals at this time would be extremely detrimental to Caldor's reorganization effort, and would cause unacceptable delay.

Discussion

A creditors' committee stands as a fiduciary to the class of creditors it represents. E.g., Woods v. City National Bank, 312 U.S. 262, 268-69, 61 S.Ct. 493, 497, 85 L.Ed. 820 (1941); Bohack Corp. v. Gulf & Western Indus., 607 F.2d 258, 262 n. 4 (2d Cir.1979); In re Celotex Corp., 123 B.R. 917, 920 (Bankr.M.D.Fla.1991). Its principal function "is to advise the creditors of their rights and the proper course of action in the bankruptcy proceedings." Bohack Corp. v. Gulf & Western Indus., 607 F.2d at 262 n. 4 (citations omitted). Accordingly, pursuant to § 1103(c), an official committee may:

(1) consult with the trustee or debtor in possession concerning administration of the case;

(2) investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor\'s business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan;

(3) participate in the formulation of a plan, advise those represented by such committee of such committee\'s determinations as to any plan formulated, and collect and file with the court acceptances or rejections of a plan;....

11 U.S.C. § 1103(c). To that end, an official committee may "select and authorize the employment ... of one or more attorneys, accountants, or other agents, to represent or perform services for such committee." 11 U.S.C. § 1103(a). Professionals retained by an official committee owe fiduciary duties to the committee. E.g., In re Arlan's Dept. Stores, Inc., 615 F.2d 925, 943-44 (2d Cir. 1979); In re Mesta Mach. Co., 67 B.R. 151, 153, 158 (Bankr.W.D.Pa.1986). See also In re Oliver's Stores, Inc., 79 B.R. 588, 597 (Bankr.D.N.J.1987) ("the integrity of the bankruptcy system demands that the professionals serving the committee not place themselves in a situation where their independence, loyalty and integrity can be questioned by the unsecured creditor body whom they represent").

Public policy favors permitting parties to retain professionals of their choice. In re Codesco, Inc., 18 B.R. 997, 999 (Bankr. S.D.N.Y.1982) ("`only in the rarest cases should the trustee be deprived of the privilege of selecting his own counsel ...'") (quoting In re Mandell, 69 F.2d 830, 831 (2d Cir.1934)). See In re Brennan, 187 B.R. 135, 150 (Bankr.D.N.J.1995) (there is a presumption in favor of a party's right to an accountant of its choice). Nonetheless, the Code limits an official committee's right to retain professionals to assist it in fulfilling its statutory duties, as follows.

An attorney or accountant employed to represent a committee appointed under section 1102 of this title may not, while employed by such committee, represent any other entity having an adverse interest in connection with the case. Representation of one or more creditors of the same class as represented by the committee shall not per se constitute the representation of an adverse interest.

11 U.S.C. § 1103(b). The Trustee construes the phrase "adverse interest in connection with the case" to apply when the professional represents, in any context — whether or not in the underlying bankruptcy case — an entity that has an interest adverse to that of the committee, whether or not the interest arises in the bankruptcy case. The Trustee contends that because Bradlees and Caldor compete in the same market niche, the interests of the Committees are adverse and the Professionals are barred from representing the Caldor Committee, even though Bradlees does not have a claim in and is not a party to this proceeding. Alternatively, they contend that Otterbourg's retention is barred under Canons 4, 5 and 9 of the Code of Professional Responsibility. The Professionals argue that the interests of the Committees are not adverse because Caldor and Bradlees are not creditors of each other and the...