In re Lillian Laurence Ltd.

• Decision Date: 31 January 1992
• Docket Number: Bankruptcy No. 86-00816.
• Parties: In re LILLIAN LAURENCE LIMITED, Debtor.
• Court: United States Bankruptcy Courts. District of Columbia Circuit

136 B.R. 1 (1992)

In re LILLIAN LAURENCE LIMITED, Debtor.

Bankruptcy No. 86-00816.

United States Bankruptcy Court, District of Columbia.

January 31, 1992.

Philip McNutt, Washington, D.C., for debtor.

DECISION RE REVISED APPLICATION FOR APPROVAL OF EMPLOYMENT NUNC PRO TUNC

S. MARTIN TEEL, Jr., Bankruptcy Judge.

Counsel for the debtor in possession has filed a revised application for approval of employment nunc pro tunc to the commencement of the case and for interim compensation for the period from October 31, 1986 through November 30, 1989. The U.S. Trustee objects to the application on the grounds that counsel's initial application for employment was untimely, that counsel failed to file a revised application in a timely fashion, and that counsel failed to disclose a conflict of interest in the initial application. For the reasons that follow, the court denies counsel's revised application for approval of employment nunc pro tunc and for interim compensation.

FACTS

This case was commenced by the filing of a voluntary petition under Chapter 11 of the Bankruptcy Code on November 7, 1986. More than two years later, on December 7, 1988, counsel for the debtor filed an application for approval of employment nunc pro tunc and for interim compensation. On December 13, 1988, the court entered an order denying the application without prejudice on the ground that it failed to comply with the last sentence of Bankruptcy Rule 2014(a).¹ The Affidavit filed with the initial application for employment in this case merely stated that neither the affiant nor his law firm was an interested party in the Chapter 11 proceeding, nor did they hold any interest adverse to the debtor or the debtor's estate. Because the Affidavit failed to specifically state the applicant's connections with creditors or any other party in interest and their respective attorneys and accountants, the application was denied without prejudice.

It was not until February 13, 1990, that debtor's counsel filed a revised application for employment nunc pro tunc and for interim compensation of $36,906.30 plus expenses of $947.56. In the meantime, the court entered an order confirming the debtor's plan of reorganization on August 28, 1989. The revised application was accompanied by a revised Affidavit which states that counsel for the debtor had represented Burton Gertler, the sole shareholder of the debtor, regarding his personal guarantee liability for certain pre-petition debts of the debtor. The revised Affidavit further states that while representing Mr. Gertler, none of the creditors' claims against the debtor's estate were compromised, settled or negotiated, and that counsel withdrew from representation of Mr. Gertler on December 14, 1989.

On April 6, 1990, the U.S. Trustee filed a response to the revised application. While acknowledging that the service provided by counsel for the debtor benefitted the estate, the U.S. Trustee questions the timeliness of both the initial application and the revised application. Further, the U.S. Trustee objects to the revised application because counsel failed to disclose its representation of the debtor's president and sole shareholder until after a plan of reorganization was confirmed, thereby precluding the court from determining before such representation concluded whether counsel represented an interest adverse to the estate or was "disinterested" as required by Section 327(a) of the Bankruptcy Code.

DISCUSSION

Section 327(a) authorizes the trustee, with the court's approval, to employ attorneys and other professionals "that do not hold or represent an interest adverse to the estate, and that are disinterested persons."² Bankruptcy Rule 2014(a) supplements § 327(a) and provides that "an order approving the employment of attorneys . . . or other professionals pursuant to § 327 or § 1103 of the Code shall be made only on application of the trustee. . . ." Under § 1107(a), a debtor in possession is given all the rights and powers of a trustee and may therefore apply for the approval of the employment of professionals.

Courts are divided on the issue of whether the employment of a professional may be approved on a retroactive basis. Some courts have taken a strict approach and have held that an order may not be entered retroactively to approve the appointment of attorneys when counsel has not applied for an order approving his employment before he commences work. In re Liddell, 46 B.R. 682 (Bankr.E.D.Cal.1985); In re Call, 36 B.R. 374 (Bankr.S.D.Ohio 1984); In re Mork, 19 B.R. 947 (Bankr.Minn.1982). Other courts have been more lenient and have retroactively approved the employment of professionals even when the failure to obtain the requisite order results from inadvertence or neglect. In re Vlachos, 61 B.R. 473, 479 (Bankr.S.D.Ohio 1986); In re King Electric Co., Inc., 19 B.R. 660 (E.D.Va.1982). Still other courts have adopted a rule which limits retroactive approval of employment to cases in which prior approval would have been appropriate and extraordinary circumstances are present. In re Arkansas Co., Inc., 798 F.2d 645 (3rd Cir.1986); In re Diamond Mortgage Corp., 77 B.R. 597 (Bankr. E.D.Mich.1987).

In In re Johnson, 21 B.R. 217, 218 (Bankr.D.D.C.1982), this court denied a motion seeking the entry of an order authorizing the retention of counsel on a nunc pro basis. In Johnson the court entered an order authorizing the retention of counsel for the debtor in possession on May 27, 1982. Counsel subsequently sought to have the May 27, 1982, order entered on a nunc pro tunc basis in order to provide for the attorneys' services rendered from the initiation of the case in October 1981. Counsel asserted their "mistaken impression that specific appointment of counsel need not be obtained substantially in advance of the filing of a petition for interim compensation" as grounds for the relief sought. In re Johnson, 21 B.R. at 218. While this court recognized that nunc pro tunc applications in certain extraordinary situations may be warranted, it found that the facts stated in the pending motion did not compel or in any way constitute sufficient justification for the entry of a nunc pro tunc order. Id.

In this case, debtor's counsel explained the untimeliness of its initial application for approval of employment by stating that counsel believed that an application was prepared and filed with the court shortly after the case was filed. However, counsel believes that the application was either misplaced or returned by the clerk's office for some reason because it was in fact never filed. While the court does not find this explanation to constitute extraordinary circumstances which warrant the entry of a nunc pro tunc order approving employment, there exist more compelling grounds which warrant the denial of counsel's application in this case. The court finds that counsel's failure to disclose its dual representation of the debtor and the debtor's principal officer and shareholder until after its representation of the debtor had virtually been completed warrants the denial of the application for nunc pro tunc employment and for interim compensation under the facts presented in this case.

As noted in In re Grabill Corp., 113 B.R. 966, 970 (Bankr.N.D.Ill.1990), aff'd, 135 B.R. 835 (N.D.Ill.1991), there is a split of authority over whether courts should draw distinctions between potential and actual conflicts of interest. Some courts hold that potential conflicts of interest do not warrant removal of the attorney for the debtor in possession in the absence of fraud or actual conflict, whereas other courts consider the concept of potential conflicts as a contradiction in terms. In In re Kendavis Industries Int'l, Inc., 91 B.R. 742, 754 (Bankr.N.D.Tex.1988), the court held that whenever counsel for a debtor corporation has any agreement, express or implied, with management or a director of the debtor, or with a shareholder, or with any control party, to protect the interest of that party, counsel holds a conflict. Further, the court held that the conflict is actual, not potential, and that it arises the date that representation commences. Id.

In Roger J. Au & Son, Inc. v. Aetna Ins. Co., 64 B.R. 600 (N.D.Ohio 1986), a case similar to the one at bar, the district court upheld the bankruptcy court's determination that an attorney and his law firm's past representation of the principal officer and sole shareholder of the debtor, which representation included legal services relating to the potential liability of the officer arising from personal guarantees of various loans obtained by the debtor, rendered them not "disinterested" as defined in section 101(13) of the Code, and disqualified them under section 327(a). Roger J. Au & Son, Inc. v. Aetna Ins. Co., 64 B.R. at 606. The bankruptcy court found, inter alia, that the representation by the attorney and his firm of the debtor in possession and the debtor in possession's sole shareholder and principal officer, who was also a guarantor of certain of the debtor in possession's debts, created a significant danger of a shifting of loyalties. Id. The district court found ample authority to support the bankruptcy judge's determination that the possibility of conflict warrants disqualification of an attorney who represents simultaneously a debtor in possession, and the debtor in possession's sole shareholder and principal officer where the two hold potentially adverse interests. Id.

However, in In re Huddleston, 120 B.R. 399 (Bankr.E.D.Tex.1990), the court allowed the dual representation of the debtor-in-possession corporation and its debtor-in-possession sole shareholder. In Huddleston, both a corporation and its sole shareholder filed for protection under Chapter 11, and each debtor filed an application to employ the same partner of the same law firm. The U.S. Trustee filed an objection to the applications on the ground that a potential conflict of interest existed...