In re WM Distribution, Inc.
| Decision Date | 21 June 2017 |
| Docket Number | No. 17–10535–j11,17–10535–j11 |
| Citation | 571 B.R. 866 |
| Parties | IN RE: WM DISTRIBUTION, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
William F. Davis, Nephi D. Hardman, William F. Davis & Assoc., P.C., Michael K. Daniels, Albuquerque, NM, for Debtor.
Leonard K. Martinez–Metzgar, Albuquerque, NM, for U.S. Trustee.
On June 7, 2017, the Court held a final hearing on Debtor's Application to Employ William F. Davis & Associates, P.C. (Docket No. 5) (the "Application"). Susan Jesmer d/b/a Native Trading Associates ("Ms. Jesmer"), Donald Packingham, and the United States Trustee (the "UST") filed objections to the Application (Docket Nos. 26, 34, and 40) asserting that William F. Davis & Associates, P.C.'s (the "Davis Firm") simultaneous representation of WM Distribution, Inc. ("WM Distribution") and Sandia Tobacco Manufacturers, Inc. ("STM") is a disqualifying conflict of interest.1 The Davis Firm appeared at the final hearing for WM Distribution. Dylan O'Riley appeared for Ms. Jesmer. Richard Marquez appeared for Donald Packingham. Leonard Martinez–Metzger appeared for the UST.
WM Distribution is primarily in the business of distributing cigarettes to vendors in New Mexico and surrounding states. WM Distribution also distributes food and drinks to those vendors ancillary to its cigarette distribution. WM Distribution has a close working relationship with STM. STM also distributes cigarettes and some food items to vendors in the same territory. Della Packingham, Donald Packingham's estranged wife, is WM Distribution's president and owns 90% of WM Distribution's outstanding shares. Donald Packingham is STM's president and owns 90% of STM's outstanding shares. Donald and Della Packingham's divorce is currently pending in New Mexico state court. Donald and Della Packingham's daughter, Donna Woody, owns 10% of the outstanding shares of both WM Distribution and STM. Donna Woody is vice-president of WM Distribution and STM and manages the daily operations of both companies. The Davis Firm reports to and takes instructions from Donna Woody in connection with its representation of WM Distribution and STM.
WM Distribution and STM primarily distribute two cigarette brands, Sandia and Royal. WM Distribution owns the Sandia trademark. STM owns the Royal trademark. STM works with the various governmental regulatory agencies to obtain necessary licenses and approvals for both the Royal and Sandia brands. The Sandia brand is approximately three times more profitable than the Royal brand. For many years, STM manufactured cigarettes under the Sandia and Royal brands. It ceased manufacturing cigarettes several years ago. Today, Seneca, a company unaffiliated with either WM Distribution or STM, manufactures cigarettes under the Sandia and Royal brands for sale to STM. WM Distribution buys cigarettes from STM. STM also sells cigarettes to others.
WM Distribution purchases cigarettes for resale from STM at a rate of approximately $50,000.00 to $60,000.00 each week. WM Distribution scheduled a pre-petition non-priority unsecured debt to STM of $514,113.60 for unpaid cigarette purchases. STM is WM Distribution's largest unsecured creditor by a large margin and holds approximately 50% of WM Distribution's total unsecured debt.
WM Distribution occupies one third of the space in a warehouse STM rents, a value of approximately $3,500.00 a month. WM Distribution does not pay STM for WM Distribution's use of the warehouse, nor does WM Distribution reimburse STM for WM Distribution's portion of the utilities costs at the warehouse. There is no licensing agreement between WM Distribution and STM for STM's use of the Sandia brand owned by WM Distribution and STM does not pay WM Distribution any licensing fees. WM Distribution and STM regularly use each other's employees without compensation and without tracking such use. WM Distribution and STM are covered under the same insurance policy for worker's compensation and sexual harassment claims. These interrelations, which have lasted for many years, will require accounting and legal work to determine whether one company has a net claim against the other apart from STM's claim against WM Distribution for unpaid cigarette purchases.
Other creditors with large claims.
WM Distribution previously leased commercial space from Market Center @ Renaissance, LLC ("Market Center"). STM is a guarantor on WM Distribution's lease with Market Center. WM Distribution scheduled an unliquidated debt to Market Center in the amount of $360,000.00 for unpaid rent. Market Center is WM Distribution's second largest unsecured creditor. WM Distribution's third largest scheduled unsecured debt is almost $300,000.00 less than its scheduled debt to Market Center.
WM Distribution has two secured creditors in this bankruptcy case. WM Distribution's largest secured creditor is Ms. Jesmer. WM Distribution scheduled a secured debt to Ms. Jesmer of $63,224.08. WM Distribution listed STM as its co-debtor on that debt. Ms. Jesmer filed a secured claim of $725,994.73 which it claims is secured by all WM Distribution's assets. Ms. Jesmer identified the basis of that debt as a promissory note and attached a copy of that promissory note (the "Jesmer Note"). The Jesmer Note identifies WM Distribution and STM as the co-makers. Ms. Jesmer contends that STM's bankruptcy filing triggered a default provision under the Jesmer Note providing for an additional $600,000.00 due under that note, which she seeks to enforce against WM Distribution but not STM. Donald Packingham filed a secured claim of $49,000.00. Donald Packingham's stated basis for that secured claim is "[p]roperty is owned by Donald Packingham." WM Distribution intends to dispute Ms. Jesmer's claim but has not yet filed an objection to the claim. No deadline for objections to claims has been set in WM Distribution's bankruptcy case.
STM's bankruptcy case.
STM filed a chapter 11 bankruptcy case on September 19, 2016. See Bankruptcy Case No. 16–12335–j11, Docket No. 1. The Court entered an order approving the Davis Firm's representation of STM in its bankruptcy case on October 18, 2016 without objection. See Bankruptcy Case No. 16–12335–j11, Docket No. 16. STM's schedules show $423,339.02 in total assets and $15,981,217.69 in total liabilities. Bankruptcy Case No. 16–12335–j11, Docket No. 27.
A large portion of STM's debt is to various federal and state regulatory agencies. STM scheduled a non-priority unsecured debt to Donald and Della Packingham in the amount of $2,800,000.00. Donald Packingham filed a secured claim in STM's bankruptcy case in the amount of $2,000,000.00. STM scheduled a non-priority, contingent, unliquidated, and disputed unsecured $0.00 claim of Market Center. STM identified the basis of the Market Center claim as "[c]ontingent liability for lease of WM, Inc." Bankruptcy Case No. 16–12335–j11, Docket No. 27.
STM scheduled a contingent, unliquidated, and disputed secured debt to Ms. Jesmer of $117,316.18. Ms. Jesmer filed a secured claim in STM's bankruptcy case of $86,466.00. The basis for that claim is the Jesmer Note.
Conflicts of interest.
Donna Woody believes it is in the best interest of both WM Distribution and STM for both companies to successfully reorganize. Donna Woody also believes that, at present, it is in both companies' best interest for WM Distribution to continue to buy Sandia and Royal branded cigarettes from STM. If WM Distribution were to purchase its cigarettes directly from the manufacturer or through another intermediary, Donna Woody believes it would hinder STM's ability to reorganize. One reason WM Distribution purchases its cigarettes from STM rather than directly from the manufacturer is that STM is authorized to purchase cigarettes on which taxes have not yet been paid. Donna Woody also testified, however, that she is considering whether WM Distribution at some point should buy cigarettes directly from Seneca (for which taxes have been paid) instead of buying the cigarettes from STM. This could affect STM's and WM Distribution's profitability, as well as how each company structures its chapter 11 plan. As WM Distribution prepares to draft a plan of reorganization, it will need to consider whether its present relationship with STM is in its best interest for its reorganization prospects. WM Distribution must be able to openly consider options that could negatively affect STM. Donna Woody has a duty of loyalty to both WM Distribution and STM, which will make that consideration more challenging.
Donald Packingham, as 90% owner of the capital stock of STM, is seeking to terminate the services of the Davis Firm as counsel for STM and relieve Donna Woody of her authority to manage STM and act as its agent with respect to its bankruptcy case. In an adversary proceeding STM commenced, the Court entered a preliminary injunction enjoining Donald Packingham from taking any action to fill the vacant seat on STM's board. See Adversary No. 17–1036, Docket No. 23. The injunction expires when the Court rules on confirmation of a plan of reorganization in the STM bankruptcy case or as otherwise ordered by the Court, on the condition that STM files a plan and disclosure statement by June 19, 2017. Id. STM did so. See Bankruptcy Case No. 16–12335, Docket Nos. 181 & 182.
The Davis Firm seeks approval of its employment as WM Distribution's general bankruptcy counsel pursuant to 11 U.S.C. § 327(a). That section provides:
Except as otherwise provided in this section, the trustee,2 with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee...
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