In re Cleveland Trinidad Paving Co.
| Decision Date | 31 March 1998 |
| Docket Number | Bankruptcy No. 97-15730. |
| Parties | In re CLEVELAND TRINIDAD PAVING CO., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
Joan A. Kodish, Cleveland, OH, for Debtor.
Joel Rathbone, trustee, Cleveland, OH.
Mark Schlachet, Cleveland, OH, for trustee.
Diana M. Thimming, Arter & Hadden, Cleveland, OH, for Ontario Stone Corp.
In this involuntary Chapter 7 case, Ontario Stone Corporation (Ontario), an unsecured creditor, seeks to disqualify counsel appointed for the trustee. Following a duly noticed hearing and a review of the record, generally, the following findings and conclusions are made:
The operative facts are generally not in dispute. On or about August 20, 1997, an involuntary petition for relief under Chapter 7 was filed against Cleveland Trinidad Paving Company (the Debtor). An order of relief was entered on September 17, 1997, and a trustee was duly appointed. On November 12, 1997, the trustee sought authorization to retain Attorney Mark Schlachet (Trustee's Counsel) as his legal counsel. The motion to employ counsel was accompanied by an affidavit of Attorney Schlachet.
The Debtor operated an asphalt and paving business in Cleveland, Ohio. Allega, also an asphalt paving company, completed certain of the Debtor's contracts and is a scheduled unsecured creditor of the Debtor. Prior to the Debtor being involuntarily placed into bankruptcy, the Debtor and Allega entered into an asset purchase agreement on or about May 22, 1997 wherein Allega was to acquire substantially all of the Debtor's assets which included two asphalt plants with attendant fixtures, equipment and accessories, all transferable operating permits, inventory and other personal property. (See, Ontario's Brief, Exh. B). Allega leased the subject real estate from Debtor for a ten-year period with an extension option and a $140 Thousand buy out provision exercisable during the first five years of the lease. Under the agreement, the asset purchase price was $2.55 Million, allowing Allega the use of the assets and the location from May 5, 1997 until the transaction closing date of May 22, 1997.
The Debtor's petition schedules which were filed December 15, 1997, show assets totaling $ 3,972,489.15 against total liabilities in the amount of $ 7,205,281.06. Among the Debtor's general unsecured liabilities are debts owing to Allega totaling $186,034.10.1 (See, Schedule F). As stated above, Allega is also a lessee of the Debtor's subject real property. (See, Schedule G).
The referenced Schedules show that Allega's creditor status existed as of the petition filing date. Attorney Schlachet's legal consultation with Allega on September 22, 1997 occurred postpetition while Allega maintained a general unsecured status. This legal advisement to Allega occurred after the Court's order for relief had entered on the involuntary petition filing.
The Court must determine whether the subject application and accompanying affidavit which led to the employment of trustee's counsel was sufficient to disclose any adverse interest or lack of disinterestedness on the part of trustee's counsel.
Section 327(a) of the Bankruptcy Code authorizes the trustee, with court approval, to employ professionals to assist in the administration of the trustee's duties set forth under § 704 of the Code. 11 U.S.C. §§ 327(a) and 704. Under that authority, the trustee may only appoint professional persons who do not represent or hold any interest which is adverse to the estate and who are otherwise "disinterested" persons as that term is defined under § 101(14). Under § 101(14)(E) of the Code, a disinterested person is one who . . . "does not have an interest materially adverse to the interest of the estate or any class of creditors or equity security holders by reason of any direct or indirect relationship to, connection with, or interest in, the debtor . . .". 11 U.S.C. § 101(14)(E). Where it is determined that the person retained is not a disinterested person or holds an interest adverse to the estate, § 328(c) provides for denial of compensation to a professional person so affected.
Rule 2014, Bankr.R. addresses the appointment of professionals in bankruptcy cases. Rule 2014 provides that only the trustee or a committee may seek the employment of professionals for the estate, with a copy of the application transmitted by the applicant to the U.S. Trustee. The application, inter alia, must show to the best of the applicant's knowledge all of the proposed professional's connections with the debtor, creditors and any other party in interest. Additionally, the application is to be accompanied by a verified statement from the individual to be employed showing that person's connections with the debtor, creditors, or any other party in interest, their respective attorneys and accountants, the U.S. Trustee, or any person employed in the Office of the U.S. Trustee.
In the case at bar it is both undisputed and disclosed that the trustee's counsel provided legal advice to Allega for a limited time postpetition, but prior to his appointment as trustee's general counsel. That prior representation was disclosed by affidavit in conformity with Rule 2014. Ontario seeks disqualification of the trustee's counsel on the assertion of a potential conflict.
In support of its motion to disqualify counsel, Ontario contends:
The burden of proof is on the movant, Ontario, as the party in interest who seeks disqualification of a professional appointed under § 327(a). That burden must be borne by a preponderance of the evidence to show that the standards of § 327(a) and Rule 2014 have been compromised.
In Chapter 7 cases, as well as in Chapter 11 and 12 cases, under § 327(c) of the Bankruptcy Code:
A person is not disqualified for employment under this section solely because of such person\'s employment by or representation of a creditor unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest.
11 U.S.C. § 327(c). The 1984 amendment to § 327(c) was specifically enacted to lessen the constraints on creditors' counsel who wished to serve as general counsel to trustees or debtors-in-possession. Prior to the 1984 Amendments, § 327(c) absolutely prohibited an attorney from representing a trustee and a creditor in the same case.2
Due to the unique nature of the bankruptcy process, the need to preserve the public's confidence, and the integrity of the system, courts are obliged to apply the Bankruptcy Code's ethical standards to conflict of interest issues. In re Amdura Corp., 121 B.R. 862, 866 (Bankr.D.Colo.1990). The gravamen of these issues in bankruptcy has been succinctly explained in the following manner:
Strong policy reasons lie behind the prohibition of conflicting interests in the same case. Dual representation is improper because the client has a right to expect undivided loyalty, and an attorney\'s zealous representation of one client might come at the expense of another client. In addition, there is an omnipresent fear that an attorney representing multiple interests in the same case will be motivated by different desires and objectives, depending upon his own interest in a particular client. Finally, former clients have a right to expect that privileged information exchanged through communication with their attorney will not be used against them in the attorney\'s subsequent representations in substantially related matters. See generally International Business Machines Corp. v. Levin, 579 F.2d 271, 280 (3d Cir.1978); Fund of Funds Ltd. v. Arthur Andersen & Co., 567 F.2d 225, 232-33 (2d Cir.1977). An attorney representing multiple conflicting interests thus undermines and subverts the nature of the adversarial system and prevents it from operating properly.3
"To hold or represent an interest adverse to the estate" means (1) to hold or assert any economic interest that would tend to reduce the value of the bankruptcy estate or that would give rise to an actual or potential dispute in which the estate is a rival claimant, or (2) to possess a predisposition under circumstances that render such predisposition a bias against the estate. In re C.F. Holding Corp., 164 B.R. 799 (Bankr. D.Conn.1994). As made clear by the above referenced cases, each instance of alleged conflict or lack of disinterestedness is factdriven and must be determined on a case-by-case basis. In re Sixth Ave. Car Care Center, 81 B.R. 628 (Bankr.D.Colo.1988).
The facts in this case demonstrate that, as required under Rule 2014, Attorney Schlachet's affidavit revealed that his law practice is located in the same building where Allega's law firm is located, although he is a sole practitioner. Postpetition, and prior to his appointment as the trustee's counsel, he provided legal advice to Allega on September 22, 1997.
The affidavit disclosed the relationship between Attorney Schlachet, the Debtor and Allega, and Allega's counsel as follows:
To continue reading
Request your trial