In re HML Enters., LLC
| Decision Date | 12 October 2016 |
| Docket Number | Case No. 16-90033,Case No. 16-90030 |
| Parties | IN RE: HML ENTERPRISES, LLC xx-xxx0117 Debtor IN RE: POULTRY PELLETS OF ARCADIA, LLC xx-xxx5053 Debtor |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
This matter came before the Court upon hearing the "Debtor's Amended Application Pursuant to Section 327(a) of the Bankruptcy Code and Bankruptcy Rule 2014 for an Order Authorizing the Retention and Employment of the Law Offices of Steven M. Dowd as Attorneys for Debtor and Debtor-in-Possession Nunc Pro Tunc" filed in the above-referenced cases by HML Enterprises, LLC ("HML") and Poultry Pellets of Arcadia, LLC ("PPA"), respectively, in their former capacities as the Debtor-in-Possession in their respective cases. Each application seeks to authorize the retention of the Law Offices of Steven M. Dowd ("Dowd") as a professional person on a nunc pro tunc basis during the Chapter 11 phase of each respective case, both of which have since been converted to Chapter 7. In conjunction therewith, the Court also heard the "Motion for Distribution of Retainer" filed by Dowd in each of the above-referenced cases, as well as a "Motion to Compel Debtor's Counsel to Turnover Retainer to Chapter 7 Trustee" originally filed in the PPA case by Stephen J. Zayler, during his tenure as the Chapter 7 Trustee in that case.2 At the conclusion of the hearing, the Court granted the parties' request for a post-hearing submission of authorities. The filing period for those post-hearing submissions was extended from June 21, 2016 through August 1, 2016, and the Court thereafter took all of the matters under advisement. In resolution thereof, the Court issues the following findings of fact and conclusions of law which collectively dispose of all issues pending before the Court.
1. HML filed a voluntary petition under Chapter 11 of the Bankruptcy Code on February 2, 2016.
2. PPA, its wholly-owned subsidiary, did likewise two days later.
3. Both cases were filed in a "bare-bones" fashion. HML filed only a petition, a mailing matrix, and the required list of the twenty largest unsecured creditors. PPA filed a petition and matrix. Its required list of twenty largest unsecuredcreditors was filed late after the Court had issued a seven-day dismissal deadline.
4. Approximately one week later, a Motion of Horizon Applicators, Inc. and Genesis Industries, LLC for Adequate Protection of its (sic) Lien Against Movables and Other Property Located in Lease Property at 965 Highway 519, Arcadia, Louisiana and Adequate Protection of its (sic) Ownership Interest in Such Property (the "Landlord Motion") was filed in the HML case.3
5. The Landlord Motion revealed the existence of a pre-petition eviction lawsuit in Louisiana against both Debtors arising from an alleged breach of a 2012 lease of real property in Bienville Parish, Louisiana executed by HML.
6. The Landlord Motion alleged that HML had improperly transferred its leasehold rights to PPA.
7. It was during an emergency hearing conducted on February 25, 2016 upon the Debtor's Motion for Authority to Use Cash Collateral that had been filed by PPA in its case on February 19, 20164 (the "Cash Collateral Hearing") that the Court and parties-in-interest first learned that a sizable and potentially improper transfer of property rights from HML to PPA had occurred in the pre-petition period.
8. The primary representative for both HML and PPA, Michael Stanaland, testified at the Cash Collateral Hearing that HML had transferred all of its manufacturing assets, including raw materials, inventory and completed product, to PPA in January 2015 for no consideration.5
9. That transfer was confirmed in the HML Statement of Financial Affairs filed on March 3, 2016 which revealed that persons controlling HML had transferred assetswith a scheduled value of $949,233 to PPA on January 1, 2015.6
10. One day prior to the filing of that statement, on March 2, 2016, HML filed an application to employ Dowd nunc pro tunc as the primary bankruptcy attorney for its Chapter 11 estate pursuant to § 327(a) of the Bankruptcy Code.7
11. One day later, PPA filed an almost identical application to employ Dowd in its case.8
12. Each application for employment is substantially the same, even to the degree that the "Debtor" is mistakenly referenced as HML several times in the PPA application.
13. Each application reveals that, as to each estate, Dowd would be responsible for, among other things, "[A]dvising the Debtor concerning the actions that they might take to collect and recover property for the benefit of the estates (sic)."9
14. Each application stated that, as to each estate, "Dowd does not have any connection with the Debtor, its creditors, its insiders, its shareholders, or its respective attorneys or accountants, except as set forth in the Dowd Affidavit, a true and accurate copy of which is annexed hereto as Exhibit A."10
15. The Dowd Affidavit filed in the HML case says nothing about his relationship to PPA.
16. The Dowd Affidavit filed in the PPA case says nothing about his relationship to HML.
17. Each application claimed that, as to each estate, Dowd was a "disinterested person as that term is defined in section 101(14) of the Bankruptcy Code."11
18. Each application claimed that, as to each estate, "[N]either Dowd nor his employees hold or represent an interest adverse to the Debtor's estate."12
19. Each application reveals that, as to each estate, "Dowd was paid a security retainer in the amount of $10,000 from Fertile Soils, LLC, contributed by Dr. Sid Fowler, D.D.S., Director Debtor, of (sic) which was received on January 27, 2016.13
20. Each application discloses that "[S]ubject to allowance by the Court, Dowd will charge the Debtor for its legal services on an hourly basis in accordance with its ordinary and customary hourly rates as in effect on the date services are rendered."14
21. Each application was accompanied by a "Verified Statement of Proposed Attorney and Disclosure Pursuant to 11 U.S.C. §§ 329 and 504 and Rules 2014(a), 2016(b), and 5002 of the Federal Rules of Bankruptcy Procedure." (the "Verified Statement").15
22. The Verified Statements filed in each of the respective cases are identical.
23. Thus, as to each debtor, Dowd states under oath that "Dowd does not represent and has not represented any entity, other than the Debtor, in matters related to this Chapter 11 case."
24. Dowd further swears that he is a disinterested person and that he does not "hold or represent any interest adverse to the Debtor's estate.16
25. In each case, the Verified Statement wholly fails to disclose Dowd's representation of the other related bankruptcy estate.17
26. In each case, the Verified Statement wholly fails to reveal anything about the transfers which had occurred from HML to PPA in the pre-petition period.18
27. Dowd simply seeks to ignore the transfers for the purposes of determining disinterestedness and whether he holds an adverse interest with regard to each estate.
28. Notwithstanding the fact that the Chapter 11 phase of this case was curtailed, the issue regarding whether Dowd could have qualified at any time to be hired by both bankruptcy estates is more than a hypothetical problem or a mere contrivance.
29. It is not a latent or theoretical concern. It is an actual conflict of interest.
30. A cause of action exists for the potential benefit of one bankruptcy estate and to the potential detriment of the other. Dowd cannot ethically represent both sides of this dispute.
31. If approved as counsel for both of these bankruptcy estates, Dowd would assume an independent fiduciary duty to each estate and, with particular concern to the HML estate, such fiduciary duty would include a duty to evaluate whether any avoidance claim against PPA should be prosecuted.
32. Under these facts, from the filing of the voluntary petition, there existed an activecompetition between the two interests held by these bankruptcy estates in which one interest could only be served at the expense of the other.
33. Each estate has diametrically opposed goals with regard to these claims. Any attorney in Dowd's position would be precluded from providing an impartial analysis to each bankruptcy estate.
34. As the potential counsel for each of these bankruptcy estates, Dowd would not only possess a meaningful incentive to act contrary to the best interests of each such estate, any evaluation or action that he contemplated on behalf of one estate would necessarily adversely affect the other estate.
35. This litigation scenario between these two estates is thus the "poster child" that evidences the existence of two opposing economic interests that one attorney cannot simultaneously represent — either ethically or under the probing standards of the bankruptcy employment statutes.
36. Whether it is economically viable for HML to pursue the avoidance litigation against its subsidiary is not germane to the issue of whether Dowd is a disinterested person or holds an adverse interest to the employing estate.
37. In his efforts to be employed by both estates, Dowd is not a "disinterested person" as to each respective estate. He further holds an interest adverse to each respective estate because he could not possibly tender undivided loyalty to each such bankruptcy estate and provide untainted advice and assistance to each estate.
38. It would certainly be legally defensible to disqualify Dowd from representing either of these bankruptcy estates.
39. However, given that this decision disqualifies him from representing both sets of opposing interests held by these two bankruptcy estates, the Court has considered whether Dowd can qualify for employment by one of the estates.
40. While allowing Dowd to be proceed as counsel to either estate in an ongoing Chapter 11 context might otherwise have engendered ethical concerns from the perspective of his "former client," particularly in the...
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