In re Kendavis Industries Intern., Inc.
| Decision Date | 28 September 1988 |
| Docket Number | Bankruptcy No. 385-30348-HCA-11. |
| Parties | In re KENDAVIS INDUSTRIES INTERNATIONAL, INC., Kendavis Holding Company, Loffland Brothers Company, Mid-Continent Supply Co., Geodril, Inc., Loffland Brothers Eastern Hemisphere, Inc., Loffland Brothers (Singapore) PTE, Ltd., Debtors. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
COPYRIGHT MATERIAL OMITTED
Fred Shannon, Martin, Shannon & Drought, Inc., San Antonio, Tex., Locke, Purnell, Rain, Harrell, P.C., Dallas, Tex., for Locke, Purnell, Rain, Harrell, P.C.
Ogden N. Lewis, Davis, Polk & Wardwell, New York City, for Morgan Guar. Trust Co. of New York.
Julia Dobbins (John Blinn, Stephen Goodwin and J. Michael McBride, formerly with the firm), Shannon, Gracey, Ratliff & Miller, Fort Worth, Tex., for Official Unsecured Creditors' Committee.
David Snodgrass, Gardere & Wynne, Dallas, Tex., for Sec. Pacific Nat. Bank.
Thomas E. Kurth, Haynes & Boone, Dallas, Tex., for InterFirst Bank Dallas, N.A. and InterFirst Bank Fort Worth, N.A. (InterFirst is now First RepublicBank).
Henry Gompf, Jones, Day, Reavis & Pogue, Dallas, Tex., for Kendavis Holding Co., Loffland Bros. Co., and Mid-Continent Supply Co.
Jerry Beane, Strasburger & Price, Dallas, Tex., for First Interstate Bank of California.
J. Maxwell Tucker, Winstead, McGuire, Sechrest & Minick, Dallas, Tex., for MBank-Houston.
REVISED* FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING MOTION FOR DISGORGEMENT OF COMPENSATION PAID TO LOCKE, PURNELL, BOREN, LANEY & NEELY
One of a bankruptcy court's least favorite duties is the enforcement of the Code provisions dealing with compensation of professionals. In dealing with these provisions, the Court is not likely to win any popularity contests. Yet, it is inherently the Court's duty to examine professional compensation, and to act where problems are discovered. This case demonstrates a variety of problems on the part of counsel for the Debtor including conflicts of interest, lack of benefit to the estate, and failure to disclose compensation. It also demonstrates the problems inherent in a popular theory regarding representation of Debtors in bankruptcy, the concept of the "potential" conflict of interest. Ultimately, this case demonstrates what happens when a case is allowed to proceed with a "potential" conflict of interest, and the Court is hopeful that it has demonstrated that a "potential" conflict is a contradiction in terms.
I. INTRODUCTION
Came on to be considered the Joint Motion for Disgorgement of Compensation and Reimbursement of Expenses Paid to Locke, Purnell, Boren, Laney & Neely ("Locke Purnell") filed by the Official Unsecured Creditors' Committees ("Committees"); Security Pacific National Bank; Morgan Guaranty Trust Company of New York; InterFirst Bank Dallas, N.A. and InterFirst Bank Fort Worth, N.A. (InterFirst is now named First RepublicBank); and MBank-Houston, N.A., (collectively "Movants"); and the Court, after a consideration of the pleadings filed, including detailed briefs, after a review of the relevant legal authorities, and after hearing extensive argument of counsel, is of the opinion that the motion should be granted, and further finds as follows:
II. FINDINGS OF FACT AND BACKGROUND RELEVANT TO ALL OTHER FINDINGS
1. These cases were initiated by the filing of involuntary bankruptcy petitions under 11 U.S.C. § 303 on February 21, 1985, against Kendavis Holding Company ("KHC") and Kendavis Industries International, Inc. ("KIII").
2. The Debtors consented to the petitions, and Orders for Relief were entered on March 19, 1985.
3. Debtor, KHC is a Nevada corporation. Directly, or indirectly, it owned more than 80% of the outstanding common stock of 20 operating companies, including the other debtors in this proceeding.
4. At various times following the filing of these cases, petitions were filed either voluntarily or involuntarily against various subsidiaries or entities related to these two debtors. Between 1985 and 1986, Orders for Relief were entered against several of these entities.
5. During the course of these proceedings, the Court authorized the law firm of Locke, Purnell, Boren, Laney & Neely, now known as Locke Purnell Rain Harrell, to represent the debtor entities.
6. The Debtors in these proceedings attempted more than once to confirm various plans of reorganization. None of those plans were able to reach standards necessary to permit confirmation.
7. On February 3, 1986, competing plans were filed by the Debtor on one hand, and by the Creditors' Committees on the other.
8. Pursuant to Court Order, hearings on the Debtors' Third Amended Joint Plan of Reorganization came on for consideration on May 7, 1986, prior to hearings on the Committees' Plan.
9. At the close of the Debtors' case in chief on June 22, 1986, the Committees moved for judgment denying confirmation of the Debtors' Plan under Federal Rule of Civil Procedure 41(b).
10. The Committees' motion was granted on June 24, 1986. An Order and supplemental findings were entered on August 6, 1986.
11. Hearings on the Committees' Plan began on June 26, 1986 and continued until November 12, 1986. At the conclusion of the hearings, the Court filed its order and findings confirming the Committees' Plan of Reorganization for KHC and KIII. The Committees' Plan was denied for Loffland Brothers Company.
12. Soon after confirmation, the reorganized Debtor sought to replace Locke Purnell, and retain the services of Jones, Day, Reavis & Pogue.
13. The Locke Purnell firm continued to act in the name of the Debtors in appealing the order confirming the Committees' Plan of Reorganization.
14. The District Court for the Northern District of Texas dismissed the Debtors' appeal and affirmed the denial of confirmation of the Debtors' Plan on March 26, 1987. In re Kendavis Holding Co., No. CA3-86-2995-G, slip op. at 4 (D.Tex. Mar. 26, 1987).
15. The United States Court of Appeals for the Fifth Circuit let stand the District Court's orders on September 24, 1987. In re Kendavis Holding Co., No. 87-1251, slip op. at 3 (5th Cir.1987) 830 F.2d 1128 (table) (per curiam).
16. Acting on instructions from this Court, Locke Purnell did not file for a writ of certiorari to the United States Supreme Court. However, attorneys working on behalf of the Davis family interests filed for a writ. The writ was denied by the Supreme Court on June 20, 1988. In re Kendavis Holding Co., No. 87-1251, slip op. at 3 (5th Cir.1987) (per curiam), cert. denied, ___ U.S. ___, 108 S.Ct. 2845, 101 L.Ed.2d 882 (1988).
17. During the course of the bankruptcy case, Locke Purnell made several fee applications to the Court. Committee members filed objections to Locke Purnell's fee applications at least 19 times. These objections included many of the objections contained in the Motion for Disgorgement. These objections included:
18. Later in the proceedings, the Committee raised other objections to Locke Purnell's interim fee applications, including:
19. Locke Purnell has been awarded interim compensation in an amount in excess of $4,000,000.00 for its activities in these cases.
20. The Orders entered by the Court approving Locke Purnell's interim fee applications were intended by the Court to be interim, and subject to reexamination at the conclusion of the case.
21. The Bankruptcy Judge originally handling this case discovered that he had a disqualification. Therefore, he recused himself, and the case was transferred to this Court on March 26, 1987.
22. On November 9, 1987, the Committee filed its Joint Motion for Disgorgement of Compensation and Reimbursement of Expenses Paid to Locke Purnell.
23. On January 11, 1988, Locke Purnell filed its Answer to Factual Contentions Contained in the Joint Motion for Disgorgement of Compensation and Reimbursement of Expenses and its Brief in Opposition to the Motion.
24. On February 29, 1988, this Court held an evidentiary hearing on the Committees' assertion that Locke Purnell improperly failed to disclose a retainer from which it made withdrawals.
25. On April 28, 29, and May 2, 1988, this Court held evidentiary hearings on the remaining contentions contained in the Committees' Motion.
26. The Court accepted proposed findings of fact and conclusions of law from the parties on July 11, 1988.
III. COMMENT REGARDING THE COURT'S POWER TO DETERMINE THIS CONTROVERSY — LAW OF THE CASE
One side issue raised in this proceeding is whether this Court has the authority to address the issues raised in the Committees' motion. The Court believes that this issue was adequately addressed by the Court orally at an early hearing, but a restatement is perhaps appropriate here.
Locke Purnell has suggested that this Court lacks authority to determine this controversy, based on the Law of the case doctrine. Locke Purnell notes that its previous interim fee applications were approved by order of the Court. In those orders, various findings were made regarding Locke Purnell's right to payment under the applicable provisions of the Bankruptcy Code. Locke Purnell suggests that the findings in these orders are binding on this Court. In short, Locke Purnell argues that the Court lacks authority to alter its previous fee orders. The Committees take the position that the...
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