In re Covenant Financial Group of America, Inc.
| Decision Date | 07 January 1999 |
| Docket Number | Bankruptcy No. 97-07424-BGC-7. |
| Citation | 243 BR 450 |
| Parties | In re COVENANT FINANCIAL GROUP OF AMERICA, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Alabama |
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Covenant Financial Group of America, Inc., Pro se.
Thomas Reynolds, Birmingham, Alabama, trustee.
Order Approving Employment of John Joseph Smith, Jr. As Attorney for the Trustee (For a Special Purpose Under 11 U.S.C. § 327(e))
The matters before the Court are the Application for Approval of Employment of Special Counsel filed on August 6, 1998 by the Chapter 7 trustee, Mr. Thomas E. Reynolds and an Objection to Application for Approval of Employment of John Joseph Smith, Jr. filed on September 8, 1998, by Mr. William Michael Keever and Stewart Keever, L.L.C. The trustee seeks to employ Mr. Smith to represent the estate's interest in a legal malpractice suit filed by the debtor and others against Mr. Michael Keever and others.
A hearing on both matters was held on October 27, 1998. Appearing were Mrs. Brenda Shifflet Spahn, a stockholder in, the president of, and the chief operating officer of the debtor, and the owner and the operator of several related corporate entities; Mr. Reynolds; Mr. Smith; Mr. David Maxey, the attorney for Mr. William Michael Keever and Stewart Keever, L.L.C.; and Mr. Thomas Corbett, the attorney for the Bankruptcy Administrator. The matters were submitted on the representations of the trustee, the testimony of Mrs. Spahn and Mr. Smith, the record in this case, the arguments of counsel and the opponent's brief.
The debtor corporation filed for Chapter 11 relief on October 2, 1997. The case was converted to Chapter 7 on July 7, 1998; however, during the Chapter 11 period, Mrs. Spahn employed Mr. Smith to file a legal malpractice lawsuit on her behalf and on behalf of the debtor and several related corporations.1 On May 15, 1998, Mr. Smith filed that suit in the state court against Mr. William Keever and others.2
The trustee seeks to employ Mr. Smith under 11 U.S.C. § 327(e) to represent the bankruptcy estate's interest in the pending malpractice action.3 Section 327(e) allows for the employment of attorneys for specified, special purposes.
The trustee's application discloses that Mr. Smith represents Mrs. Spahn, the debtor, and some debtor-related corporate entities. The application discloses further that under Mr. Smith's contract of employment with the plaintiffs, that Mr. Smith was to receive a $20,000 retainer to be paid personally by Mrs. Spahn. If the plaintiffs were successful, the parties agreed that, prior to any portion of the recovery being paid to Mr. Smith as a fee or before any portion was divided among the plaintiffs, Mrs. Spahn would be reimbursed for payment of the retainer. As full compensation, Mr. Smith was to receive 50 percent of any recovery obtained by him.
The trustee's proposal is similar. The trustee proposes to compensate Mr. Smith with 50 percent of any amount recovered, (minus the expenses and any reimbursement due Mrs. Spahn because of her payment of any portion of the retainer) and to reimburse Mr. Smith for all expenses advanced in the litigation.4
Mr. Keever, who is a creditor of the debtor, filed a proof of claim in this case on October 24, 1997 for $2,119.21. The basis of Mr. Keever's objection to Mr. Smith's employment is that Mr. Smith is not a disinterested person and that if Mr. Smith represents the trustee that Mr. Smith's representation of Mrs. Spahn, along with the corporate entities, would create an interest adverse to the debtor and the bankruptcy estate. Mr. Keever's objection is the only objection filed with the Court.
The trustee, who is an attorney, represented to the Court that he could not, and that he would not, employ any attorney other than Mr. Smith. The trustee explained that: Mr. Smith is a specialist in the legal malpractice field, a field in which very few work and even fewer specialize; Mr. Smith is intimately familiar with the details of this case; and, because the estate has no funds to advance for the litigation, Mr. Smith has agreed to represent the estate on a contingency fee basis. In the trustee's opinion, because of the undesirable nature of the lawsuit, that is because it is a legally and factually complex legal malpractice claim, there is no reasonable expectation that the trustee will be able to find another attorney to prosecute the lawsuit, and certainly will not be able to find one willing to work on a contingency fee basis.5
Mr. Smith testified that he was licensed to practice law in 1970 and that for the last six or seven years he has devoted a substantial portion of his practice to legal malpractice matters.
Mr. Smith's association with the debtor began in February 1998 or March 1998 when Mrs. Spahn contacted him about pursuing a lawsuit against Mr. Keever. Mr. Smith and the debtor (by way of Mrs. Spahn as a stockholder in and the president and chief operating officer of the debtor, and the owner and the operator of several related corporations) thereafter entered into a contract where Mr. Smith would represent Mrs. Spahn, the debtor and others in such a suit and that Mr. Smith would receive, as compensation, 50 percent of any recovery. The contract also called for Mr. Smith to be paid a $20,000 retainer to be applied against the contingency fee and for Mrs. Spahn to be responsible for the payment of that retainer. The suit was filed in May 1998.
In regard to performance under the contract, Mr. Smith testified that as of the date of the hearing, he had received about $5,000 of the retainer. He understood, from a conversation with the trustee, that the estate had no money to pay him any portion of the remainder of that retainer, but despite that fact, Mr. Smith has agreed to represent the estate in the lawsuit based on the promise of the 50 percent contingency fee, a fee Mr. Smith testified was the usual and customary fee in legal malpractice cases.
As to the specific claim, Mr. Smith explained that the lawsuit belongs to the debtor. He testified that the other corporate entities were included as plaintiffs out of an abundance of caution since Mr. Keever's alleged malpractice arose from an aborted plan to merge all of the corporate entities into one corporation and to make a public issue of shares of that corporation. The other corporate entities do not hold claims against Mr. Keever that are separate or different from the debtor's claim. All of the corporate entities named in the complaint are wholly owned and operated by Mrs. Spahn with the possible exception of one, Tax Max, in which her son may be a nominal accommodation shareholder. All of the corporations operated out of the same office and performed symbiotic personal financial services (tax preparation and advice, debt consolidation, insurance, and the like) for "middle class" consumers.
Mr. Smith testified that he has assimilated and reviewed a vast amount of documentary evidence in investigating and preparing the lawsuit for trial, but that he has not made an assessment of the value of the case and is unable to offer any opinion regarding the prospect of a recovery or of the possible amount of any recovery. His common practice, he explained, is to tell his clients in legal malpractice cases, that realistically they should not expect any recovery.
Mr. Smith testified that he has not and does not represent Mrs. Spahn in any capacity other than as a plaintiff in the state court lawsuit. And in Mr. Smith's opinion, there is no conflict of interest in his representation of the co-plaintiffs in the lawsuit.6
Finally, Mr. Smith related to the Court that Mrs. Spahn has agreed, for herself and as the representative of all of the corporate entities, that any recovery in the lawsuit will be paid to the bankruptcy trustee in this case for distribution pursuant to the Bankruptcy Code.7
Mrs. Spahn confirmed Mr. Smith's representation that any money recovered in the lawsuit will be paid to the trustee for distribution according to the Bankruptcy Code. And Ms. Spahn added that although she is personally a creditor of the debtor, she was willing to withdraw the proof of claim filed on her behalf and waive any claim she may have to participate in a distribution in this case, if doing so would facilitate the trustee's employment of Mr. Smith. Mrs. Spahn stated candidly that she does not expect to receive any money from the lawsuit, or from the debtor, even though she has invested a great deal of money in the debtor.
Mrs. Spahn confirmed Mr. Smith's assurance that he has not and does not represent her in any capacity other than as a plaintiff in the state court lawsuit.
Section 327(e) of the Bankruptcy Code governs the matters before the Court.8 That section provides:
The trustee, with the court\'s approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.
11 U.S.C. § 327(e) (emphasis added). Consequently, the issues before the Court are: (1) is Mr. Smith's employment in the best interest of the estate, and (2) if Mr. Smith is employed, would he, by virtue of his past, present, or anticipated future representation of the estate, the corporate debtor, the debtor's president, and the related corporate entities as co-plaintiffs in the lawsuit, represent an interest adverse to the debtor or the bankruptcy estate.
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