In re Cardinal Fastener & Specialty Co.

• Decision Date: 04 February 2013
• Docket Number: Case No. 11-15719
• Court: U.S. Bankruptcy Court — Northern District of Ohio
• Parties: In re: CARDINAL FASTENER & SPECIALTY CO., INC., Debtor.

In re: CARDINAL FASTENER & SPECIALTY CO., INC., Debtor.

Case No. 11-15719

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION

DATED: February 4, 2013

Chapter 7

Chief Judge Pat E. Morgenstern-Clarren

MEMORANDUM OF OPINIONAND ORDER¹

Reminger Co., LPA (the firm) served as special counsel to chapter 11 debtor Cardinal Fastener & Specialty Co., Inc. When the case converted to chapter 7, the chapter 7 trustee asked the firm to turn over documents relating to or belonging to the debtor. The firm declined to do so, responding that at least some of the documents are protected by the attorney-client privilege and the work product doctrine based on the firm's alleged separate representation of the debtor's officers and directors. The trustee then filed a turnover motion, which the firm opposes. For the reasons stated below, the trustee's motion is granted.²

I. JURISDICTION

Jurisdiction exists under 28 U.S.C. 1334 and General Order No. 2012-7 entered by the United States District Court for the Northern District of Ohio on April 4, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2), and it is within the court's constitutional authority as analyzed by the United States Supreme Court in Stern v. Marshall, 131 S.Ct. 2594 (2011).

II. STIPULATED FACTS

The debtor Cardinal Fastener & Speciality Co., Inc. filed its chapter 11 case on June 30, 2011. On July 18, 2012, the court granted the debtor's motion to convert the case to chapter 7. The chapter 7 trustee and the firm submitted this dispute for decision on these stipulated facts:³

1. On or about November 14, 2011, the Official Committee of Unsecured Creditors (the "Committee") sent a demand letter (the "Demand") to the Debtor, alleging, among other things, certain claims and causes of action against the Debtor. Following that, the Demand letter states:

Therefore, the Committee, on behalf of the unsecured creditors, hereby demands payment from the Debtor on the unsecured claims in an amount currently estimated at $4,138,841.00. The Committee further hereby demands that the Debtor provide notice to the Debtor's insurance carrier for the Debtor's directors and officers liability insurance ("D&O Insurance") of the claims being asserted by the Committee.

In addition to the foregoing, the Committee anticipates that the Debtor also possesses claims against its officers and directors, including breach of fiduciary duty, arising from their negligence or fraudulent mischaracterization or misrepresentation of the Debtor's financial statements. Therefore, the Committee further demands that the Debtor provide notice to the Debtor's insurance carrier of the Debtor's claims.

The Demand letter also states in a footnote:

The Committee is also in the process of investigating additional claims that the unsecured creditors may possess against the Debtor, its officers, directors, agents and equity holders.

(Exhibit A, Demand Letter; see also Application to Employ at Doc. # 186 at p. 4 ¶ 13).

2. On December 9, 2011, a Reminger time entry reads: "Correspondence to [Debtor's counsel] Rocco Debitetto ("Debitetto") regarding retention by [the Debtor] in connection with claims referenced by [the Committee]." (Exhibit B, Reminger Time Entries ("Time Entries") at p. 3).

3. By letter dated December 15, 2011⁴ , the Debtor responded to the Committee's Demand letter (the "Response"), stating that Reminger "has been engaged vis-à-vis [the Debtor's] insurer in order to address the alleged claims and causes of action set forth in the Demand Letter, including those regarding alleged director and officer claims." (Exhibit C, Letter from the Debtor to the Committee dated December 15, 2012).

4. On January 11, 2012, the Committee filed its Rule 2004 motion to obtain documents from the Debtor and the Court approved the motion on the same day. (Doc. #'s 175 & 176).

5. On January 12, 2012, the Committee served the subpoena. (Exhibit D, Subpoena and Doc. # 177).

6. On January 24, 2012, Reminger conferred with Debitetto "regarding potential claims against directors and officers, [the] subpoena relating to decisions made by [the] directors and officers, and strategy for further case handling." (Exhibit B, Time Entries at p. 6).

7. On February 14, 2012, Reminger had a teleconference with Debitetto, Mr. Grabner⁵ and Mr. Ciuni "regarding financial reclassification of assets in order to better understand the claims of the Committee against [the Debtor's] directors in preparation for further case handling and 2004 examination document production." (Exhibit B, Time Entries at p. 11).

8. On February 17, 2012, Reminger recorded the following time entries:

Review of cases regarding negligent misrepresentation, privity and causes of action belonging to unsecured creditors.

Preparation of memorandum regarding review of cases.

Initial research of Ohio and Federal case law regarding causes of action against directors and officers for misrepresentations of financial statements. . . .

(Exhibit B, Time Entries at p. 14).

9. On February 21, 2012, the Debtor filed an "Application of Debtor . . . for the entry of an Order Authorizing the Debtor to Retain and Employ Reminger as Special Counsel, Nunc Pro Tunc as of the Date Filed ("Application to Employ"). (Doc. # 186).

10. Also on February 21, 2012, Reminger signed a verified declaration in support of the Application to Employ (the "Reminger Declaration"), stating "Reminger has agreed to advise and represent [the Debtor] ... in the above-captioned chapter 11 case in respect of the Alleged Claims." (Doc. #186 at p. 14 ¶ 2).

11. In addition, the Reminger Declaration states:

3. Neither I, nor Reminger . . . , as far as I have been able to ascertain after reasonable investigation, have any connection with (a) Debtor; (b) Debtor's executive officers, directors, and shareholder(s); (c) the twenty (20) largest unsecured creditors of Debtor; (d) parties to significant litigation with Debtor; (e) Debtor's secured creditors; or (f) the Office of the United States Trustee (based on Reminger's investigation of its client lists as of the date of this Application), nor does Reminger represent any other known or reasonably ascertainable interest adverse to Debtor in the matters upon which it is engaged.

4. Should Reminger discover during the pendency of the Case that it represents, in unrelated matters, an entity or person that has an interest adverse to Debtor in the Case, Reminger will disclose such information to Debtor and the Court the nature of such representation and relationship thereto.¹

n.1: To the extent that derivative claims are asserted against the Debtor's directors and officers, which has not happened to date, Reminger will revisit the scope of its engagement herein and, if necessary,withdraw from its representation of the Debtor in order to represent the Debtor's directors and officers.

(Doc. # 186 at ¶¶ 3 and 4, and n.1).

12. Paragraph 17 of the Reminger Declaration states:

17. To the extent that Reminger subsequently discovers any facts bearing on this Verified Declaration or its representation of Debtor, this Verified Declaration will be supplemented and those facts will be fully disclosed to the Court.

(Doc. #186 at ¶ 17).

13. On March 6, 2012, Reminger entered the following time entries:

Further research of Ohio case law regarding whether directors and officers can be held personally liable for torts committed while in the course and scope of their employment . . . .

Further analytical review of Ohio case and statutory law regarding personal liability of directors and officers for torts committed while in the course and scope of employment . . . .

Summarization of Ohio case law regarding whether directors and officers can be held personally liable for torts committed while in the course and scope of employment

. . . .

(Exhibit B, Time Entries at p. 16).

14. On March 21, 2012, a Reminger time entry reads: "Review cases re[garding] potential claims against directors and officers, standing to assert them, re[garding] potential for proceeds from Travelers[' insurance] policy to wind up in [the] bankruptcy estate." (Exhibit B, Time Entries at p. 16).

15. On March 23, 2012, the Court granted the Application to Employ (Doc. # 194) ("Agreed Order"), nunc pro tunc to February 21, 2012. The Agreed Order states:

3. Debtor shall and hereby is authorized and empowered to employ Reminger as special counsel pursuant to section 327(a) of the Bankruptcy Code, effective nunc pro tunc as of the filing of the Application, for matters related to any and all threatened or asserted claims and causes of action potentially covered by the Debtor's Private Company Directors and Officers Liability and Fiduciary Liability Policies, and to respond on behalf of the Debtor to the subpoena served upon the Debtor by the Official Committee of Unsecured Creditors (the "Committee pursuant to the Committee's Application of the Official Committee of Unsecured Creditors for Entry of an Order, Pursuant to Fed. R. Bankr. P. 2004 [Docket No. 175].

(Doc. # 194 at p. 2 ¶ 3).

16. On July 18, 2012, the Court entered an order granting the Debtor's motion for an order converting the chapter 11 case to a case under chapter 7. (Doc. # 217).

17. On August 1, 2012, a Reminger time entry reads: "Multiple conference with Atty. Debitetto regarding effect of Chapter 7 conversion." (Exhibit B, Time Entries at p. 20).

18. On August 2, 2012, a Reminger time entry reads: "Review Chapter 7 conflict and policy issues." (Exhibit B, Time Entries at p. 21).

19. On October 18, 2012, Reminger sent a letter responding to a request from the Trustee's counsel to turn over its files. In pertinent part, the letter states:

You have requested that Reminger turn over its complete file in this matter. We believe we are precluded from doing so both legally and ethically.

* * *

While there is no doubt that Reminger was employed as "special counsel" for the "Debtor," a review of the Court's Agreed Order (ECF Doc. 194) is instructive in this matter. While

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