In re Lewis Road, LLC

• Decision Date: 09 December 2011
• Docket Number: Case No. 09-37672
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: LEWIS ROAD, LLC, Debtor.

IN RE: LEWIS ROAD, LLC, Debtor.

Case No. 09-37672

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA RICHMOND DIVISION

Dated: December 9, 2011

MEMORANDUM OPINION

The Court has before it the Chapter 11 Trustee's motion filed under Rule 60(b) of the Federal Rules of Civil Procedure¹ as made applicable herein by Rule 9024 of the Federal Rules of Bankruptcy Procedure (the "Motion") wherein the Trustee requests relief from certain provisions of an order entered by the Court on January 20, 2011, authorizing and approving a settlement agreement by and among the bankruptcy estate, EVB, William H. Talley I, LLC ("Talley") and Smurfit-Stone Container Corporation ("Smurfit-Stone") pursuant to Bankruptcy Rule 9019 (the "9019 Order"). A hearing on the Motion was conducted on October 5, 2011, at which the Court granted the relief requested by the Trustee. This memorandum opinion sets forth the Court's findings of fact and conclusions of law in support of that ruling in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.²

The Court has subject-matter jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) in which final orders or judgments may be entered by a bankruptcy court. Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409(a).

FACTS

Lewis Road, LLC (the "Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on November 20, 2009 (the "Petition Date"). The Debtor retained control over the property of the estate and continued to operate the Debtor's business as Debtor-in-Possession in accordance with §§ 1107 and 1108 of the Bankruptcy Code.³ The Debtor's sole assets were two adjoining parcels of real estate located at 5700 and 5690 Lewis Road in Sandston, Virginia (together, the "Property"). As of the Petition Date the Property was leased to Smurfit-Stone. Two deeds of trust encumbered the Property. EVB held two promissory notes in the amounts of $1,025,000 and $575,000 that were secured by a first-priority deed of trust lien on the Property (the "Senior Claim"). Talley held a promissory note in the amount of $500,000 that was secured by a second priority deed of trust lien on the Property (the "Junior Claim").⁴

On December 29, 2009, the Debtor filed an application to employ the law firm of Ayers & Stolte, P.C. ("Ayers & Stolte") as counsel for the Debtor in Possession pursuant to § 327(a) of the Bankruptcy Code (the "Application"). The Application provided that Ayers & Stolte would receive $20,000 for its services, and also stated that:

Proposed counsel has connections with the debtor (including prepetition advice concerning the debtor's financial situation and the preparation and filing of its chapter 11 petition) and connections with a creditor. This potential conflict of interest has been waived and proposed counsel has no connections with any otherparty in interest, nor their respective attorneys and accountants, the United States Trustee, and any person employed in the office of the United States Trustee.

Application to Approve Employment of Counsel for the Debtor in Possession, In re Lewis Road, LLC, No. 09-37672 (Bankr. E.D. Va. Dec. 29, 2009) (emphasis added). Although the Application indicated that the verified statement required of proposed counsel under Federal Rule of Bankruptcy Procedure 2014 was attached as an exhibit, no such verified statement was submitted to the Court.⁵ Ayers & Stolte did not provide with its Application any information concerning the identity, nature, or scope of its "connections with a creditor" nor did it provide any information concerning the waiver of the "potential conflict." An order approving the Application was not entered until December 20, 2010, almost a year after the Application was submitted.⁶

The lease between the Debtor and Smurfit-Stone expired on December 15, 2010. Smurfit-Stone elected not to renew the lease.⁷ The lease required Smurfit-Stone either to remove the improvements that it had made to the Property or to deed those improvements over to the Debtor at the end of the lease term. Compliance with this requirement was complicated by the discovery of the fact that a portion of the building Smurfit-Stone had constructed on the Property was actually located on a separate parcel owned by Smurfit-Stone adjoining the Property (the "Smurfit-Stone Property). Following a demand by the Debtor that Smurfit-Stone remove thebuilding and return the Property to its original condition, the Debtor and Smurfit-Stone entered into an agreement (the "Settlement Agreement"), in which Smurfit-Stone agreed to transfer the Smurfit-Stone Property to the Debtor, pay the Debtor the sum of $350,000, and make certain repairs to the building.

EVB and Talley were also parties to the Settlement Agreement. The Settlement Agreement provided for the distribution of the $350,000 settlement payment as follows:

(i) $250,450.82 was to be paid to EVB on account of its attorneys fees and expenses, late charges, accrued and unpaid interest, and other charges and expenses provided for under the applicable loan documents, with any remaining funds to be applied to outstanding principal;

(ii) $74,549.18 was to be paid to Talley on account of its attorneys fees and expenses incurred in connection with the negotiations with Smurfit-Stone; and

(iii) $25,000 was to be paid to the Debtor and to be held in its debtor-in-possession account for maintenance and related matters with respect to the Property and for quarterly U.S. Trustee fees.

Motion for Entry of Order Approving Agreements, In re Lewis Road, LLC, No. 09-37672 (Bankr. E.D. Va. Dec. 22, 2010). The Court conducted a hearing on January 19, 2011, to consider the Debtor's motion for approval of the Settlement Agreement under Rule 9019 of the Federal Rules of Bankruptcy Procedure.⁸ The Court granted the motion and approved the Settlement Agreement in its 9019 Order entered January 20, 2011.⁹

After entry of the 9019 Order, the Debtor received an offer to purchase the Property for $2,700,000 from NYW Enterprise, LLC (the "Purchaser"). A hearing was scheduled for April 20, 2011, to obtain Court approval of the sale. This relatively routine proceeding took anunexpected turn when the United States Trustee informed the Court that Ayers & Stolte was representing not only the Debtor but also the holder of the Junior Claim, Talley, in connection with the Debtor's bankruptcy case. Upon examination by the Court, Alexander Ayers confirmed that both he and Charles Ayers were employed by Ayers & Stolte. He further advised the Court that Charles Ayers had been representing Talley in the bankruptcy case while he was representing the Debtor. The dual representation included the negotiation of the Settlement Agreement that the Court had just recently approved, and specifically the negotiation of the agreements between Talley and the Debtor that were embodied in paragraph 5(b)(ii) of the Court's 9019 Order.

Alexander Ayers explained that his father had not yet been retained to represent Talley when Ayers & Stolte submitted its Application to employ the firm, and he expressed the opinion that he did not believe that he needed to disclose the relationship between his firm and Talley or to disqualify himself because "everyone was working together to achieve a positive resolution to this matter." Transcript of Hearing on Motion to Sell, In re Lewis Road, LLC, No. 09-37672 (Bankr. E.D. Va. Apr. 20, 2011). Counsel for EVB informed the Court that while he was aware of the conflict and concerned by it, he had been led to believe that Ayers & Stolte had received an opinion from the Virginia State Bar permitting the joint representation with the consent of the parties involved.

At the conclusion of the April 20, 2011, hearing, the Court approved the sale of the Property to the Purchaser and the release of a portion of the sale proceeds in the amount necessary to satisfy the Senior Claim of EVB. The Court directed that the remaining sales proceeds were to be held in escrow by counsel for EVB pending further order of the Court. The Court scheduled an evidentiary hearing for May 25, 2011, for the Debtor to show cause why theCourt should not appoint a Chapter 11 Trustee in the case. See Order Approving Sale of Real Property Free & Clear of all Liens and Granting Related Relief, In re Lewis Road, LLC, No. 09-37672 (Bankr. E.D. Va. Apr. 28, 2011).

Five days prior to the scheduled show cause hearing Alexander Ayers filed a letter response to the Court's April 28, 2011, order in which he stated that he was "completely taken by surprise by this issue" because the employment of Ayers & Stolte was approved by the Court and because both he and Charles Ayers, "both members of Ayers & Stolte, appeared in front of [the] Court at a previous hearing, whereby [Alexander Ayers] represented the Debtor and [his] father represented W. Harold Talley I, LLC, a creditor." Letter Filed by Alexander Hamilton Ayers, In re Lewis Road, LLC, No. 09-37672 (Bankr. E.D. Va. Mar. 20, 2011). Alexander Ayers then stated that he had informed the Court of the connection between his firm and Talley in his Application to employ in which "[he] informed the Court . . . that [his] firm had connections with a creditor and that this potential conflict was waived by all parties." Id. The Court was not impressed with this response.¹⁰ The Court was disappointed by the fact that Ayers & Stolte had not immediately withdrawn as counsel for Talley when the Court brought the conflict to the firm's attention at the April 20, 2011 hearing. When Ayers & Stolte presented no evidence at the hearing conducted on May 25, 2011, the Court directed the United States Trustee to appoint aChapter 11 Trustee. Augustus C. Epps, Jr. was appointed as the Chapter...