In re Creative Restaurant Management, Inc., Bankruptcy No. 92-40743 to 92-40747.
| Decision Date | 08 April 1992 |
| Docket Number | Bankruptcy No. 92-40743 to 92-40747. |
| Citation | 139 BR 902 |
| Parties | In re CREATIVE RESTAURANT MANAGEMENT, INC., Creative Restaurant Operating Company, CRM of Kansas, Inc., Fred P. Ott's, Inc., Fred P. Ott's of Kansas, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Paul M. Hoffmann, Smith, Gill, Fisher & Butts, Kansas City, Mo., for debtors.
Paula C. Acconcia, U.S. Trustee's Office, Kansas City, Mo., for the U.S. Trustee.
Michael R. Roser, Lathrop & Norquist, Kansas City, Mo., for the Creditors' Committee.
This opinion first addresses the issue of whether a law firm is automatically ineligible to represent a Chapter 11 debtor-in-possession if a member of such law firm is so ineligible. Based on the plain language of the applicable statutes, I find that there is no per se rule. Instead, the Bankruptcy Court must determine whether such firm has an interest which is materially adverse to the estate. The opinion then considers the circumstances under which a law firm which represented a debtor in its pre-bankruptcy planning and negotiations with creditors can continue to represent the debtor-in-possession after the bankruptcy case is filed. Here, the law firm had settled a fee dispute with the debtors immediately prior to the filing of the case, on terms which appear to be favorable to the debtors. The debtors, though given the option to do otherwise, have chosen to continue with such law firm. I find, based on the applicable statutes and rules of professional conduct, that a competent law firm chosen by a debtor can only be removed upon a showing that such firm is in fact ineligible to represent its client. An unsupported allegation that the law firm "appears" to be ineligible is not sufficient for removal. Until a sufficient showing is made, the firm's representation should continue so that the case can be most efficiently processed in the best interest of all parties. In the event evidence is later offered to show that such firm was in fact ineligible to represent these debtors, the Court will at that time remove counsel and may, within its discretion, order that any fees paid to the firm be disgorged. But for now, the United States Trustee's Motion to Reconsider the order approving employment of counsel to the debtors, and the objection of the Creditors' Committee to such employment, will be denied. As indicated, such denial is without prejudice to any rights or remedies available to the United States Trustee, or creditors, if facts are developed to demonstrate that such firm is ineligible to serve in this case.
In its motion to reconsider the order authorizing retention of counsel, the United States Trustee relies in large part on the past relationship between the law firm and these debtors. Therefore, a brief discussion of that relationship is appropriate.
These debtors were created in 1988, as Delaware corporations. At the time the debtors were formed, and ever since, they have been represented by the Smith, Gill, Fisher & Butts law firm ("Smith Gill"). Such firm performed the full range of corporate, litigation, tax, and other services that a law firm would be expected to perform for clients such as these. Mr. David Butts, who is now Managing Partner of the law firm, was at the outset the lead attorney in such representation. For a period of time, from November 15, 1988 to October 30, 1990, Mr. Butts served as Assistant Secretary of Creative Restaurant Management, Inc. ("CRM"), one of the five debtors. As is often the case with corporate counsel, Mr. Butts held that office as a convenience, allowing him, for example, to attest corporate documents. Both while he served as Assistant Secretary, and since, he has attended meetings of CRM's Board of Directors as counsel and has usually prepared minutes of such meetings. Other than two documents which were attested by him, he appears to have performed no duties as Assistant Secretary which would not have been performed anyway as corporate counsel.
In late November 1991, the companies faced a shortage of financing needed to get them through the slower winter season. As a result, the companies called on the services of Paul Hoffmann, a bankruptcy attorney with the Smith Gill firm. Based on my analysis of billing records of the law firm, Mr. Hoffmann, by December 1, had begun an extensive review of the companies' financial structure, with a view toward either reaching an accommodation with creditors, or filing Chapter 11. As is customary in large Chapter 11 cases, the law firm asked for and was paid a retainer for its services should a bankruptcy be filed. At Mr. Hoffmann's direction, various attorneys began reviewing loan documents, leases, financial statements and other papers to determine the status of the companies' assets and liabilities. Various other attorneys began researching such issues as the impact of a bankruptcy filing on COBRA benefits, liquor licenses at company restaurants, and any ongoing liability of company directors. At the same time, certain attorneys who were defending collection actions filed against the companies' continued to do so. These actions related primarily to nonpayment of rent. As part of his effort to analyze the total financial picture, Mr. Hoffmann made efforts to keep abreast of the status of such litigation. Other attorneys and paralegals performed a small amount of the type of services which would be performed routinely for a company not in financial distress. Throughout this period, Mr. Hoffmann and Mr. Butts were overseeing the work of the attorneys involved, and at the same time were negotiating with creditors to either resolve the problems or file Chapter 11. In that regard, entries from as early as December 1, 1991 show attorneys at work on first day pleadings in the event a bankruptcy filing were required. On December 2, 1991, Smith Gill cut checks for filing fees for such bankruptcy cases. However, such cases were not required to be filed at that time.
In the meantime, Mr. Butts and Mr. Hoffmann engaged in negotiations with Merchants Bank, the major lender, and with various representatives of Nabil Haddad, who had expressed interest in purchasing the assets of the debtors subject to Merchants Bank's lien. As a result, as early as January 13, 1992, lawyers at Smith Gill began work on a proposed Disclosure Statement and Plan of Reorganization reflecting such negotiations, to be filed immediately after the filing of the Chapter 11 cases. The various activities mentioned were undertaken throughout the months of December, 1991, January and February, 1992, and up to March 6, 1992.
Traditionally, the law firm had sent its bills to these companies and been paid on a monthly basis. For example, on January 15, 1992, a bill was sent by the law firm in the amount of $40,443.10, for services performed in December. That bill was paid on January 20, 1992. It should be noted that the retainer was not used to pay this bill; such retainer was instead preserved for use in a Chapter 11 case.
During this period of time a dispute developed between the companies and Smith Gill as to certain advice given in connection with the deferral of certain sales taxes from 1991 to 1992. According to both the President and the Chief Financial Officer of CRM, the companies contended that they had suffered damages of $50,000 as a result of such advice.1 Therefore, when the law firm on February 27 submitted a bill in the amount of $36,345.79, for services performed in January, the companies refused to pay it. Likewise for the February bill in the amount of $33,809.38, which was submitted on March 5, 1992. Other than the sales tax advice, the companies appear to have had no complaint with any of the legal services provided them by Smith Gill.
Despite the dispute, Smith Gill throughout this period continued to move ahead with its preparations for the bankruptcy filings. During the first week of March, the companies finalized an agreement with Mr. Haddad's group for the sale of virtually all of the companies' assets. That agreement, which was made subject to approval of creditors and the Court, required a closing on or before May 22, 1992. Such agreement also provided a procedure for other potential buyers to outbid Haddad in bankruptcy court. Due to the companies' continuing losses, the buyer required that the sale be expedited. In the meantime, the companies had concluded, based in part on the advice of Smith Gill, that a Chapter 11, and not an out-of-court workout was needed. That was because under Delaware law a stockholder vote was needed for such a sale,2 and also no doubt because the consent of all trade creditors could not be immediately obtained. In addition, as noted the Haddad agreement required bankruptcy court approval. In order to have enough time to comply with the bid procedures, as well as bankruptcy rule notice requirements,3 so that the sale could be closed timely, it was necessary that the Chapter 11 cases be filed immediately.
Thus, by the first week in March the companies were irrevocably committed to Chapter 11. At that point, the companies initial failure to pay the February 27 bill presented itself as a problem, first because, as will be shown, the Bankruptcy Code prohibits an attorney from representing a debtor as general counsel if such attorney is a creditor of such debtor. The United States Trustee routinely objects, and properly so, to the retention by debtor of an attorney who is a creditor.4 Thus, if the companies were to retain Smith Gill in the bankruptcy case, the outstanding bill needed to be paid. As will be shown, the Bankruptcy Court has the duty of reviewing all fees paid counsel within the year prior to the filing of the case; therefore, even if the bills were paid, the companies retained their right to challenge the validity of such bills, and to recover all or a portion of the monies so paid.
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