In re MH Group, Inc., Bankruptcy No. 91-32732.

• Decision Date: 08 August 1991
• Docket Number: Bankruptcy No. 91-32732.
• Citation: 139 BR 836
• Parties: In re M-H GROUP, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

139 B.R. 836 (1991)

In re M-H GROUP, INC., Debtor.

Bankruptcy No. 91-32732.

United States Bankruptcy Court, N.D. Ohio, W.D.

August 8, 1991.

Ruth Meacham, Toledo, Ohio, for debtor.

Michael Messenger, Toledo, Ohio, for Fifth Third Bank of Toledo, N.A.

MEMORANDUM OPINION AND ORDER

RICHARD L. SPEER, Bankruptcy Judge.

This cause comes before the Court after Hearing on the United States Trustee's Motion for Relief from Order Appointing the law firm of Marshall & Melhorn as counsel for the Debtor. At the Hearing, the parties were afforded the opportunity to present the arguments and evidence they wished the Court to consider in reaching its decision. The Court has reviewed the relevant case law, the arguments and evidence presented, as well as the entire record in this case. Based upon that review, and for the following reasons, the Court finds that the law firm of Marshall & Melhorn should be disqualified from serving as counsel for the Debtors.

FACTS

On July 12, 1991, M-H Group, Inc. (hereinafter "M-H"), and its subsidiaries, Meilink Industries, Inc. (hereinafter "Meilink") and Hercules Stamping Co. (hereinafter "Hercules") (hereinafter collectively referred to as "Debtors"), filed for Bankruptcy under Chapter 11 of the Bankruptcy Code.

M-H is a holding company and the sole shareholder of both Meilink and Hercules. Meilink manufactures insulated files and safes. Hercules manufactures metal stamped components for use with Meilink and for use in the automotive, appliance, and furniture industries. M-H owes Fifth Third Bank of Toledo, N.A. (hereinafter "Fifth Third") Three Million Three Hundred Thousand Dollars ($3,300,000.00). M-H guaranteed this loan and secured it with the assets of Meilink and Hercules.

Along with the petition, applications for the employment of the law firm of Marshall & Melhorn (hereinafter "M & M") as attorney for the Debtors were filed. These applications contained the following disclosures:

(a) M & M has represented Fifth Third which is a secured creditor of the Debtors. Such representation involves primarily transactional matters with the exception of one securities offering in 1988. M & M has never represented Fifth Third in any matter or transaction involving the Debtors of its related subsidiaries.

(b) M & M represents the Debtors\' affiliates which have filed related Chapter 11 cases.

(c) One of the partners of M & M, Reeve Kelsey, previously served as secretary of the Debtors, whose primary responsibilities consisted of maintaining corporate records. Mr. Kelsey received no compensation for his services and resigned effective July 10, 1991.

(d) M & M has represented some of the shareholders who are also Directors of the Debtors. None of the shareholders are creditors of the Debtors either directly or indirectly as personal guarantors of corporate debt.

Affidavit of Ruth A. Meacham signed July 12, 1991.

On July 15, 1991, during a Hearing on the Debtor's Motion for Use of Cash Collateral, the Court granted the Debtor's Application to employ M & M. At this Hearing, M & M informed the Court that a group of individuals hereinafter "lending group" would be lending the Debtors money on a revolving line of credit. These individuals included some officers of the Debtors in addition to persons not affiliated with the Debtors.

On July 23, 1991, the United States Trustee hereinafter "UST" filed the instant Motion. M & M filed a response. The Court set the matter for Hearing, at which the following facts were revealed:

Reeve Kelsey, partner of M & M, testified that he was the corporate secretary for M-H, Meilink, and Hercules. He testified that he served as corporate secretary for Meilink and Hercules until about eight (8) or nine (9) months ago. He testified that he served as corporate secretary for M-H until the day prior to Bankruptcy, at which time he resigned. He further testified that he was lead counsel in M & M for the Debtors prior to Bankruptcy. Mr. Kelsey testified that M & M represents the Chief Executive Office and some of the directors of the Debtors individually. Mr. Kelsey also testified that in the past, he had performed work for Fifth Third. Furthermore, Mr. Kelsey testified that at the time of filing, M & M represented some of the individuals in the lending group, though none asked for his advice on the revolving loan.

James B. Silk, general counsel for Fifth Third, testified the he had retained M & M to do work for Fifth Third. Mr. Silk testified that Fifth Third had expended over Forty Thousand Dollars ($40,000.00) in legal expenses to M & M since January 1, 1991. He further testified that M & M would be paid additional fees for their role as legal counsel in a lender liability action. He testified that he had dealings with Richard Kerger, Lori Decker, and Donald Frazer, all attorneys at M & M who would be working with the Debtors. He did not indicate if he had dealings with Ruth Meacham or Mark Rose, also attorneys at M & M authorized to work on behalf of the Debtors. Mr. Silk further testified that he had been apprised of M & M's intentions to represent the Debtor and that "it didn't bother him that M & M would represent the Debtors and that his thoughts were that M & M had not represented Fifth Third in any type of a matter that would give M & M an advantage in representing M-H against us." Transcript of proceedings before Honorable Richard L. Speer, United States Bankruptcy Judge, July 31, 1991, p. 40.

At the Hearing, Dean Wyman, representing the UST, stated that the Twenty Thousand Dollar ($20,000.00) retainer paid by the Debtors to M & M at the inception of the case should be returned to the Debtors. Mr. Wyman argued that his office could not determine if the check had been paid pre-petition. He indicated that if the check had not been paid pre-petition, that such post-petition payment was unauthorized. He indicated further that should M & M be allowed to continue to serve as counsel for the Debtors, M & M would have to file a Motion to receive a post-petition retainer. Mr. Wyman contended that if M & M should be disqualified, they should be denied any compensation as they were not disinterested, even under a quantum meruit theory.

Ruth Meacham, on behalf of M & M and lead counsel for the Debtors, argued that M & M should remain employed as counsel for the Debtors. She contended that due to the close relationship between M-H, Meilink, and Hercules, due to the on-going labor contract negotiations, and due to the progress M & M had made in making the Debtors a successful Chapter 11, that M & M should continued to represent the Debtors. She contended that if the Court recognized an inexcusable conflict, the Court could take curative measures. She contended that removal of M & M would cause unreasonable consequences for the Debtors. As to the receipt of the retainer, she presented the Court with a copy of a deposit slip reflecting a deposit into the firm's account for Twenty Thousand Dollars ($20,000.00) on July 11, 1991, one day prior to Bankruptcy.

LAW

There are two issues before the Court: (1) Whether M & M has complied with the disinterestedness requirement of the Bankruptcy Code; and (2) Whether they should be compensated for their services rendered to date. The Court believes that M & M is not a disinterested party for Bankruptcy purposes and therefore must be disqualified from serving as counsel for the Debtors.

The Bankruptcy Code requires debtors in possession to employ disinterested professionals to assist them in their cases. The Code states that

Except as otherwise provided in this section, a debtor in possession with the court\'s approval, may employ one or more attorneys . . . or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent to assist the debtor in possession in carrying out the debtor in possession\'s duties under this title.

11 U.S.C. § 327(a) and § 1107(a). A "disinterested person" is one who

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

(D) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor . . . ;

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

11 U.S.C. § 101(13)(A),(D), and (E). An "insider" for corporate debtors includes directors or officers of the debtor. 11 U.S.C. § 101(30)(B).

The UST claims that M & M never met the disinterestedness requirement, based upon M & M's own disclosures. M & M admitted that one of its partners served as secretary for all three corporate Debtors, but resigned from two of them within one year, and in M-H's case one day, before the Bankruptcy petition was filed. M & M also had a Two Thousand Four Hundred Eighteen Dollars and Forty-two Cent ($2,418.42) pre-petition claim against the Debtor for non-Bankruptcy legal services, which the firm waived. At the time of petition, M & M represented Fifth Third in major litigation in a lender liability action unrelated to the Debtors. M & M also represented some shareholders and officers of the Debtors individually at the time the petition was filed. M & M represented M-H, Meilink, and Hercules which were, and still are, creditors of each other. Finally, the firm represented some of the individuals who comprised the lending group. Clearly, the Court cannot authorize the application of M & M's appointment based upon these connections under Section 327. This ruling in no way reflects upon the abilities of M & M to provide competent legal counseling as the Court does not question M & M's abilities. As Bankruptcy Courts are courts of equity, however, the issue remains as to whether the Court can authorize M & M's application under the Court's equitable powers.

Section 105 of the Bankruptcy Code empowers ...