In re JMK Constr. Group, Ltd.

• Decision Date: 09 December 2010
• Docket Number: Nos. 10-14847(MG),Nos. 10-13968(MG),Nos. 10-13959(MG),Nos. 10-13965(MG),s. 10-13968(MG),s. 10-13965(MG),s. 10-13959(MG),s. 10-14847(MG)
• Citation: 441 B.R. 222
• Parties: In re JMK CONSTRUCTION GROUP, LTD., Debtor. In re John Varacchi, Debtor. In re George Donohue, Debtor. In re Jacob M. Kopf, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

441 B.R. 222

In re JMK CONSTRUCTION GROUP, LTD., Debtor.

In re John Varacchi, Debtor.

In re George Donohue, Debtor.

In re Jacob M. Kopf, Debtor.

Nos. 10-13968(MG), 10-13965(MG), 10-13959(MG), 10-14847(MG).

United States Bankruptcy Court,

S.D. New York.

Dec. 9, 2010.

Pick & Zabicki LLP, New York, NY, by Douglas J. Pick, Esq., Eric C. Zabicki, Esq., for JMK Construction Group, Ltd., John Varacchi, George Donohue and Jacob M. Kopf.

Tracy Hope Davis, New York, NY, by Serene K. Nakano, Esq., United States Trustee for Region 2.

Catafago Law Firm, P.C., New York, NY, by Jacques Catafago, Esq., for Creditor Air China, Ltd.

Shafferman & Feldman LLP, New York, NY, by Joel M. Shafferman, Esq., for the Official Committee of Unsecured Creditors of JMK Construction Group, Ltd.

MEMORANDUM OPINION AND ORDER DENYING RETENTION OF: (1) PICK & ZABICKI LLP AS COUNSEL TO EACH OF THE DEBTORS; (2) EDWARD WEISSMAN, ESQ. AS SPECIAL COUNSEL TO DEBTORS JOHN VARACCHI AND GEORGE DONOHUE; AND (3) PETER A. MORALES, CPA, PC AS ACCOUNTANT TO JMK CONSTRUCTION GROUP, LTD. AND JACOB M. KOPF

MARTIN GLENN, Bankruptcy Judge.

This opinion addresses the proposed retention by multiple debtors of a single professional under section 327(a) of the Bankruptcy Code where the debtors in these four cases may hold claims for contribution against one another and some of the debtors are creditors of others. The debtor in each of four related bankruptcy proceedings, In re JMK Construction Group, Ltd., In re George Donohue, In re John Varacchi, and In re Jacob M. Kopf, filed an application (the "P & Z Retention Applications") to retain Pick & Zabicki LLP ("P & Z") as counsel to the debtor in each case (collectively, the "Debtors"). Two of the debtors, Varacchi and Donohue, also seek to retain The Law Offices of Edward Weissman ("Weissman") as special litigation counsel pursuant to section 327(e) of the Bankruptcy Code in connection with a judgment rendered against the Debtors in a federal court action entitled Air China Limited v. Nelson Li, et al., Docket No. 07-cv-11128 (LTS) (DFE) (the "Air China Case") that was the impetus for the filing of these bankruptcy petitions. Two debtors, JMK Construction Group, Ltd. ("JMK") and Kopf, also filed applications for retention of Peter A. Morales, CPA, PC ("Morales") as accountant in the JMK and Kopf bankruptcy cases pursuant to section 327(a) of the Bankruptcy Code. The United States Trustee (the "U.S. Trustee") opposes the retention of P & Z as counsel, Weissman as special counsel and Morales as accountant, arguing that there are disabling conflicts of interest that preclude representation by the professionals of more than one debtor. Air China, Ltd. ("Air China"), as a judgment creditor to the Debtors, opposes the retention of P & Z and Morales based on what it perceives as P & Z's failure to disclose material facts relating to the relationships between the Debtors, and, as a result of such relationships, ongoing irremediable conflicts of interest. The Court held a hearing on the applications on November16, 2010 and took the matters under submission.

As a result of the judgment against the Debtors in the Air China Case, the Debtors may continue to have a right of contribution against each other under New York law. Even though inter-debtor claims were purportedly "waived" by a letter filed with the Court, such waiver is both ineffective and insufficient to waive the actual conflicts of interest present here. For the reasons discussed below, the Court agrees with the U.S. Trustee and Air China and denies the retention applications of P & Z, Weissman and Morales. P & Z, Weissman and Morales may seek retention as counsel to only one of the Debtors in their reorganization cases.

I. BACKGROUND

JMK, Donohue, Varacchi and Kopf each filed voluntary petitions for bankruptcy protection after a jury returned a verdict against them in the Air China Case, tried before the Hon. Laura Taylor Swain in the United States District Court for the Southern District of New York (the "District Court"). JMK, Donohue and Varacchi filed voluntary petitions on July 23, 2010. (JMK ECF # 1; Donohue ECF # 1; Varacchi ECF # 1.) Kopf filed a voluntary petition on September 14, 2010. (Kopf ECF # 1.) All parties acknowledge that it was the jury verdict in the Air China Case that served as the primary motivation for the filing of all four bankruptcy petitions.

A. The Air China Case

On July 14, 2010, a jury returned a verdict in favor of Air China against the Debtors for fraud in the inducement, unjust enrichment and conversion. (Objection of the United States Trustee to the Retention Appls. of Pick & Zabicki LLP, Edward Weissman, Esq. and Peter A. Morales, CPA, PC (the "U.S. Trustee Objection") at 3-4, Ex. A; JMK ECF # 63; Kopf ECF # 62; Donohue ECF # 66; Varacchi ECF # 59.) The jury also awarded punitive damages against Varacchi, Donohue and Kopf in connection with a scheme to defraud Air China and the general public into believing that the defendants were representatives of the William B. May Real Estate Company. ( Id.) On August 10, 2010, judgment was entered in the District Court against Kopf in the amount of $1,473,307.89 (Air China Case ECF # 201.) On September 15, 2010, judgment was entered against Varacchi in the amount of $70,005.95, and against Donohue in the amount of $50,804.41. ( Id.; Air China Case ECF # 223.) On October 13, 2010, this Court lifted the automatic stay to permit the Debtors to prosecute their appeal in the Air China Case and to permit entry of judgment against JMK. (JMK ECF # 41; Donohue ECF # 60; Kopf ECF # 33; Varacchi ECF # 55.) On October 14, 2010, judgment was entered in the District Court against JMK in the amount of $261,449.59. (U.S. Trustee Objection at 5; Air China Case ECF # 225.) The Debtors have appealed the judgments to the United States Court of Appeals for the Second Circuit. (U.S. Trustee Objection at 5.) Air China has also cross-appealed.

B. The Satin Case

JMK and Kopf were among the parties sued on September 21, 2009 in the Supreme Court of the State of New York by plaintiff Adam Satin (the "Satin Case"). (U.S. Trustee Objection at 5, Ex. C.) Satin alleges that JMK and Kopf granted him a 25% ownership interest in JMK, and seeks a declaratory judgment of Satin's ownership rights, damages for breach of fiduciary duty and unjust enrichment. ( Id.) On February 5, 2010, the defendants' motion to dismiss the breach of fiduciary duty andunjust enrichment claims was denied. ( Id.) According to the U.S. Trustee, JMK and Kopf have not asserted cross-claims against each other.

C. The Inter-Debtor Claims

The P & Z Retention Applications, accompanying affidavits in support of retention and schedules filed by certain of the Debtors indicate the existence of inter-debtor claims. According to Kopf's schedules, JMK owes approximately $38,000 to Kopf. (Kopf ECF # 8, Schedule B; Kopf ECF # 23 ¶ 4(e).) JMK also owes approximately $270,000 to CMA ("CMA"), a corporation solely owned by Kopf. (Kopf ECF # 23 ¶ 4(e).) The indebtedness incurred by JMK is for advances and capital infusions that Kopf made to JMK, and an initial capital contribution made by CMA to start up and sustain JMK's operations. (Aff. of Douglas J. Pick in Resp. to Objections of the United States Trustee to Debtors' Appls. For Authority to Retain Pick & Zabicki LLP as Counsel (the "Pick Response") ¶ 12; JMK ECF # 65.) In addition, Varacchi owes Kopf $16,000 on account of a personal loan. (Kopf ECF # 23 ¶ 4(e).) Therefore, P & Z seeks to be retained by both debtors (JMK and Varacchi) and creditors (Kopf) in these related reorganization proceedings.

In an apparent attempt to remedy any conflicts as a result of the inter-debtor claims, Kopf filed a letter with the Court purporting to irrevocably waive his right to repayment from JMK. (Kopf ECF # 45; JMK ECF # 46.) Kopf also filed a letter on behalf of CMA purporting to waive its right to repayment by JMK. (JMK ECF # 47.) To date, there has been no waiver of the $16,000 claim that Kopf has against Varacchi.

D. The Retention Applications

1. Retention of P & Z as Counsel to Each of the Debtors

P & Z filed retention applications for its retention as counsel to each of the Debtors pursuant to section 327(a) of the Bankruptcy Code. (JMK ECF # s 14, 21, 22, 33, 36; Kopf ECF # s 12, 23; Donohue ECF # s 31, 33, 42; Varacchi ECF # s 23, 26, 37.) Attached to each of the applications is an affidavit of Douglas J. Pick in Support of Application For Authority to Retain Pick & Zabicki LLP, Nunc Pro Tunc, as Counsel to the Debtor (the "Initial Pick Affidavit"). (JMK ECF # 14; Kopf ECF # 12; Donohue ECF # 21; Varacchi ECF # 23). The Initial Pick Affidavit, filed on August 19, 2010 in the JMK matter, recognized that P & Z was also seeking to represent the other debtors in connection with their bankruptcy proceedings.¹ (Initial Pick Affidavit ¶ 3.) The Initial Pick Affidavit attached to each of the P & Z Retention Applications also states that "P & Z does not, and has not, represented any of the parties related to the Debtor, its creditors and other parties-in-interest." ( Id.) Finally, as a catch-all, Pick affirmed that "[a]lthough P & Z has attempted to identify all such representations, it is possible that P & Z may have represented certain of the Debtors' creditors or other entities that consider themselves parties-in-interest in matters unrelated to this chapter 11 case." (Initial Pick Affidavit ¶ 4.)

On August 30, 2010, Pick filed a supplemental disclosure affidavit further disclosing the nature of the relationship between the Debtors (the "Second Pick Affidavit"). (JMK ECF # 22; Donohue ECF # 33; Varacchi ECF # 26.) The Second Pick Affidavit readily disclosed that JMK has a general unsecured obligation to JacobKopf, a debtor in a related proceeding, in the amount of $307,833, with $270,000 being owed to CMA, an entity solely owned by Kopf, and the balance of approximately $38,000 being owed to Kopf individually. (JMK Second Pick...