In re Hub Business Forms, Inc.

• Citation: 146 BR 315
• Decision Date: 21 October 1992
• Docket Number: Bankruptcy No. 92-13408-JNG,92-14034-JNG.
• Parties: In re HUB BUSINESS FORMS, INC., Debtor. In re WINTHROP HOSPITAL, INC., Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

146 B.R. 315 (1992)

In re HUB BUSINESS FORMS, INC., Debtor.

In re WINTHROP HOSPITAL, INC., Debtor.

Bankruptcy Nos. 92-13408-JNG, 92-14034-JNG.

United States Bankruptcy Court, D. Massachusetts.

October 21, 1992.

Michael P. Cashman, Widett, Glazier & McCarthy, Boston, Mass., for debtor Hub Business Forms, Inc.

Mary K. DeNevi, Widett, Slater & Goldman, Boston, Mass., for debtor Winthrop Hosp., Inc.

MEMORANDUM

JAMES A. GOODMAN, Chief Judge.

I. INTRODUCTION

Several applications to employ professional persons pursuant to 11 U.S.C. § 327¹ have been filed in the above captioned cases and are now pending before the Court. These two cases are not consolidated or jointly administered, but because the issues raised by the applications in the two cases are identical, the Court addresses them together in a single memorandum.

On July 23, 1992, the Court held a hearing on the application of Hub Business Forms, Inc. ("HBF") to employ an accountant, Joseph Walter, C.P.A. The U.S. Trustee objected to the application. The Court took the applications under advisement and requested the parties to submit briefs.

On August 28, 1992, the Court held a hearing on the applications of Winthrop Hospital, Inc. ("Winthrop") (1) to employ the law firm of Bagley & Bagley, P.C. as special counsel; (2) to employ the Law Offices of Peter V. Kent as special counsel; and (3) to employ the accounting firm of Ernst & Young. The Court, after requesting briefs, took the applications under advisement.

On September 17, 1992, Winthrop came before the Court on its application to employ the firm of Deloitte & Touche. The Official Unsecured Creditors' Committee objected to the application. The Court took that matter under advisement without the need for further briefs from the parties.

II. POSITIONS OF THE PARTIES

A. Applications Pursuant to Section 327(a)

The Court has before it briefs submitted by HBF and Winthrop in support of their respective applications to employ professionals, as well as the brief of the U.S. Trustee opposing HBF's application to employ Joseph Walter. Since the legal arguments of the applicants are essentially the same in both cases, the legal arguments contained in the U.S. Trustee's brief apply with equal force to Winthrop's applications.

HBF argues that section 1107 of the Bankruptcy Code creates an exception to the requirement of disinterestedness found in 11 U.S.C. § 327. HBF cites 11 U.S.C. § 101(14), which defines disinterestedness, and 11 U.S.C. § 1107(b), which it argues creates an exception to the requirements of section 327 in support of its position. Section 101(14) provides:

"disinterested person" means person that —

(A) is not a creditor, an equity security holder, or an insider;

* * * * * *

(E) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, or connection with, or interest in, the debtor . . ., or for any other reason.

11 U.S.C. § 101(14). Section 1107(b) states:

Notwithstanding section 327(a) of this title, a person is not disqualified for employment under section 327 of this title by a debtor in possession solely because of such person\'s employment by or representation of the debtor before the commencement of the case.

11 U.S.C. § 1107(b).² HBF recognizes that section 327(a) contains a two prong test that requires that professionals employed in a case be disinterested and neither hold or represent an interest adverse to the estate. However, it argues that "the twin requirements of disinterestedness and lack of adversity telescope into what amounts to a single hallmark," In re Martin, 817 F.2d 175, 180 (1st Cir.1987), so that the ultimate consideration in hiring a professional pursuant to section 327(a) is disinterestedness. HBF cites several cases in which bankruptcy courts have held that section 1107(b) provides an exception to section 327's disinterestedness requirement, allowing employment of professionals who are creditors solely because of prepetition employment. See, e.g., In re Viking Ranches, Inc., 89 B.R. 113 (Bankr.C.D.Cal.1988); In re Best Western Heritage Inn Partnership, 79 B.R. 736 (Bankr.E.D.Tenn.1987); In re Heatron, Inc., 5 B.R. 703 (Bankr.W.D.Mo. 1980).

In Viking Ranches, supra, the court considered the debtor's request to employ the accounting firm of Ernst & Whinney, the holder of an unsecured, prepetition debt in the approximate amount of $21,000, for services performed in a case with total debt far in excess of that amount. The U.S. Trustee filed the only objection to the application. Relying upon In re Pierce, 809 F.2d 1356 (8th Cir.1987), he argued that Ernst & Whinney as a creditor was not disinterested and that the majority of cases hold that section 1107(b) "applies as an exception only where the professional is not owed any money pre-petition, and had merely been previously employed by the debtor-in-possession." Viking Ranches, 89 B.R. at 114. Noting a distinction between debtor-in-possession cases and trustee cases, the court stated the following:

the purpose of the Section 1107(b) exception in debtor-in-possession cases is to allow the debtor-in-possession to utilize its "management team" which may include professionals who are familiar with the operation of the business and in whom the debtor-in-possession has confidence. Obviously, if these professionals have provided regular service to the debtor, the chances are quite substantial that these professionals will be unsecured creditors of the estate. To allow pre-petition professionals to be employed only if their debt is "paid in full," would necessitate these professionals, when they become aware of severe financial problems, to seek payment in full of the obligation in order that said professionals might be employed by the debtor-in-possession in the future. This would tend to taint the relationship of professionals to debtors-in-possession and may even encourage "adverse" positions due to the possibility that payment to these professionals, prior to bankruptcy for pre-bankruptcy work would be preferential payments and possibly voidable, if pursued by separate counsel. It does not make sense that Congress would encourage such action in debtor-in-possession cases.

Id. at 115.

The U.S. Trustee, in its opposition to HBF's application to employ Joseph Walter as an accountant, cites In re Anver Corp., 44 B.R. 615 (Bankr.D.Mass.1984), as the majority rule and the "settled law" in this district. According to the U.S. Trustee, the holder of a prepetition claim is disqualified from serving as a professional. See Anver Corp., supra. See also In re Siliconix, Inc., 135 B.R. 378 (N.D.Cal.1991) (creditors are per se "interested," and so are barred from employment as professionals); In re Watervliet Paper Co., 111 B.R. 131 (W.D.Mich.1989) (pre-petition unsecured claim by an attorney against the debtor prevents that attorney from being "disinterested"); In re Jaimalito's Cantina Associates Ltd. Partnership, 114 B.R. 1 (Bankr.D.D.C.1990) (counsel who held prepetition claim of unspecified amount did not qualify as "disinterested").

The U.S. Trustee argues that the "minority" rule advocated by Winthrop and HBF is "wrong as a matter of law." The plain meaning of the Bankruptcy Code, the U.S. Trustee asserts, is to prevent the employment of professionals with any claims against the debtor. HBF attempts to distinguish Anver on grounds that the court disqualified two professionals not merely because they were creditors but because one was an officer and the other an equity holder of the debtor. HBF correctly notes that these are relationships for which section 1107(b) does not provide an exception. Nevertheless, in Siliconix, supra, the court unequivocally rejected the reasoning adopted by HBF and Winthrop and set forth in the Viking Ranches case. The court in Siliconix stated:

The clear language of the statutes involved proscribes employment of creditors. Moreover, a majority of courts have specifically rejected the arguments offered in support of the minority rule. . . . "With respect to questions of efficiency, it is by now plain that Congress when it enacted § 327(a), made a conscious choice that efficiency would be sacrificed for the appearance of propriety." The bankruptcy rules were designed to "insure the integrity of the bankruptcy process and the public confidence in the bankruptcy courts."

In re Siliconix, Inc., 135 B.R. 378, 380 (Bankr.N.D.Ca.1991) (citations omitted). The court also emphasized the lack of clear standards for applying the minority rule:

courts permitting employment of creditors have required the claim against the estate be "small," and required that the particular professional must be able to confer a benefit to the debtor in terms of efficiency. However, no court has explained just how small "small" must be, and whether the size of the claim is to be evaluated in relation to the other creditors, the total debt, the size of the creditor-professional\'s business, or anything else.

Id.

B. Applications Pursuant to Section 327(e)

Two of the applications filed by Winthrop seek the employment of special counsel pursuant to section 327(e). Winthrop correctly points out that section 327(e) does not contain the requirement that the professional whose employment is sought must be disinterested. See 11 U.S.C. § 101(14). Section 327(e) requires only that the professional neither hold nor represent an interest adverse to the estate. Section 327(c) adds the requirement that there be no actual conflict of interest from the representation of a creditor of the debtor by the professional whose employment is sought. Therefore, because of the more limited scope of the employment of special counsel, some connections to the case may be allowed under subsections 327(c) and (e) that would not otherwise be allowed under section 327(a). Winthrop suggests that the appropriate test under ...