Manchester v. Kretchmar (In re Kretchmar)

• Decision Date: 04 October 2017
• Docket Number: Adv. Proc. No. 17–01026–JDL,Case No. 16–14337–JDL
• Citation: 577 B.R. 397
• Parties: IN RE: Blake Lawrence KRETCHMAR, Debtor. Susan Manchester, Trustee and Farm Credit of Enid, PCA, Plaintiffs, v. Blake Lawrence Kretchmar, Danny Kretchmar, Debbie Kretchmar, and Kretchmar Farms, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

577 B.R. 397

IN RE: Blake Lawrence KRETCHMAR, Debtor.Susan Manchester, Trustee and Farm Credit of Enid, PCA, Plaintiffs,

v.Blake Lawrence Kretchmar, Danny Kretchmar, Debbie Kretchmar, and Kretchmar Farms, Defendants.

Case No. 16–14337–JDL

Adv. Proc. No. 17–01026–JDL

United States Bankruptcy Court, W.D. Oklahoma.

Signed October 4, 2017

Craig M Regens, G. Blaine Schwabe, III, Gable Gotwals, Susan J. Manchester, Oklahoma City, OK, for Plaintiffs.

Brendon S. Atkinson, Gungoll, Jackson, Box & Devoll, P.C., Enid, OK, Steven W. Bugg, McAfee & Taft, Oklahoma City, OK, for Defendants.

ORDER DENYING MOTION TO DISQUALIFY COUNSEL

Janice D. Loyd, U.S. Bankruptcy Judge

I. Introduction

In this adversary proceeding brought by the Trustee and a creditor for the substantive consolidation of the Debtor's Parents into Debtor's bankruptcy, the Parents seek the disqualification of the counsel for the Trustee and creditor, G. Blaine Schwabe and Craig M. Regens of the firm of Gable Gotwals ("GableGotwals"). Before the Court for consideration is the Motion of Danny and Debbie Kretchmar to Disqualify Plaintiffs' Counsel(the "Motion") [Doc. 23], the Plaintiff's' Response to Defendant Parents' Motion to Disqualify Counsel(the "Response") [Doc. 29] and the Parents' Reply in Support of Motion to Disqualify Plaintiffs' Counsel(the "Reply") [Doc. 35]. The following constitutes findings of fact and conclusions of law pursuant to Fed.R. Bankr. P. 7052, as made applicable to contested proceedings pursuant to Fed. R. Bankr. P. 9014.

II. Background

On October 27, 2016, Blake Lawrence Kretchmar (the "Debtor") filed a voluntary Chapter 12 bankruptcy. [Doc. 1]. The Debtor's Schedule D reflected Farm Credit of Enid, PCA ("Farm Credit") as a secured creditor having a claim of $581,442, secured by collateral worth $446,860, with a deficiency (unsecured) claim of $245,782. [Doc. 12–1, pg.15]. On February 23, 2017, Farm Credit filed its Proof of Claim ("POC") in the amount of $583,882. [Claim 3–1]. The POC reflected that the claim was secured by, among other things, "all of debtor's equipment whether now owned or hereafter acquired ... all livestock, farm products, inventory, general intangibles, accounts ... crops, farm products", the value of which was "yet to be determined for purposes relevant to this Proof of Claim ... accordingly, the amounts of Creditor's claim which are secured and unsecured are likewise not determined." [Claim 3–1, pgs. 6–7]. The POC reserved Farm Credit's right to file an amended proof of claim to provide, among other things, the amount of its claim that was unsecured following the liquidation of collateral. [Claim 3–1, pg. 6].

On December 13, 2016, Farm Credit, acting through its counsel GableGotwals, filed its Motion for Limited Relief From the Automatic Stay and for Abandonment of Property with regard to a check from the United States Dept. of Agriculture in the amount of $22,075, payable to Farm Credit relating to the Debtor's participation in a federal farm program. [Doc. 24]. On February 6, 2017, the Court entered an Agreed Order Granting Farm Credit of Enid, PCA's Motion for Limited Relief and for Abandonment of Property by which the bankruptcy estate relinquish any interest in the check. [Doc. 41]. On February 24, 2017, Farm Credit filed its Motion for Relief From the Automatic Stay and for Abandonment of Property by which it sought to enforce its security interest in some thirty-six (36) specifically described items of personal property. [Doc. 54]. The lifting of the stay and abandonment of the property to Farm Credit was consistent with the terms of the Chapter 12 Plan proposed by the Debtor. [Doc. 51]. On March 14, 2017, the Court entered an Agreed Order Modifying Automatic Stay and for Abandonment lifting the automatic stay and abandoning the property/collateral which Farm Credit had sought. [Doc. 60].¹

Following the liquidation of its collateral, on August 8, 2017, Farm Credit filed its Amended POC in the amount of $229,760.39 (reduced from its original claim in the amount of $583,881.96) which "with a single exception remaining, is an unsecured claim ... [t]he single exception, for which Creditor's claim continues to be secured, regards Farm Credit's continuing security interest in and to one or more 2016 crop year government payments, not yet received and applied (and anticipated to be not more than approximately $20,000), the claim is an unsecured claim." [Claim 3–2, pgs. 5, 7].

On March 15, 2017, the Debtor gave notice of his conversion of the case from Chapter 12 to Chapter 7 [Doc. 61], and Susan Manchester was appointed Trustee. [Doc. 67]. On May 12, 2017, Manchester sought her appointment as attorney for the Trustee, and, without objection, on May 31, 2017, the Court appointed Manchester attorney for the Trustee. [Doc. 94].

On June 9, 2017, the Trustee filed her Application to Appoint Special Counsel seeking to employ GableGottwals "assist her to act as co-counsel in her investigation, analysis and prosecution of contested matters and/or adversary proceedings relating to possible objection to discharge, turn over of property of the estate and/or voidable transfers." [Doc. 100]. On the same date the Trustee sought to appoint GableGotwals special counsel, June 9, 2017, the Trustee filed the present adversary proceeding on behalf of herself and Farm Credit naming the Debtor and his Parents as defendants and seeking, among other things, the substantive consolidation of the estates of the Parents with Debtor's bankruptcy. [Doc. 101]. The adversary Complaint was signed by the Trustee and the GableGotwals attorneys as "Proposed Special Litigation Co–Counsel for Trustee." No objections were filed to the Application to Appoint Special Counsel, and following the expiration of the objection period, on June 26, 2017, the Court entered its Order Authorizing Trustee to Appoint Special Counsel. [Doc. 107].

The Parents have moved to disqualify the Gable Gotwals attorneys asserting that they are not "disinterested" and "represent an interest adverse to the estate" in that (1) they represent Farm Credit, a secured creditor whose interest is in conflict with the general unsecured creditors represented by the Trustee, and (2) even if Farm Credit's remaining claim(s) could be considered unsecured, if the claims of substantive consolidation were successful, the assets of the Parents would be subject to Farm Credit's security interests heretofore only asserted against the assets of the Debtor. Farm Credit and the Trustee have responded to the Motion to Disqualify by asserting (1) the Court previously entered a final appealable order appointing GableGotwals as special counsel after no party had opposed the same, (2) all of Farm Credit's collateral has been liquidated (except one government farm program check for approximately $20,000), its remaining claim of approximately $200,000 is unsecured, (3) even though Farm Credit may have a yet to be liquidated small secured claim in the nature of the government check there is no actual conflict with the interest of the Trustee on behalf of the unsecured creditors with the joint representation of GableGotwals, and (4) substantive consolidation and other avoidance claims made in the adversary pose no conflict with GableGotwals' representation as such claims are for the benefit of all unsecured creditors.

III. General Legal Standards Regarding Disqualification of Counsel

The burden of proof is on the movants as the party seeking disqualification of a professional appointed under 11 U.S.C. § 327.² In re Cleveland Trinidad Paving Co., 218 B.R. 385, 388 (Bankr. N.D. Ohio 1998). The moving party bears the initial burden of going forward with evidence sufficient to establish a prima facie case that disqualification is warranted. Lowe v. Experian, 328 F.Supp.2d 1122 (D. Kan. 2004) ; World Youth Day, Inc. v. Famous Artists Merchandising Exchange, Inc., 866 F.Supp. 1297 (D. Colo. 1994). However, the burden is not a heightened one, rather, "that burden must be borne by a preponderance of the evidence to show that the standards of § 327(a) and Rule 2014 have been compromised." Cleveland Trinidad Paving Co., 218 B.R. at 388. The ultimate burden of proof, however, lies with the attorney or firm whose disqualification is sought. Graham v. Wyeth Laboratories Division of American Home Products Corp., 906 F.2d 1419, 1424 (10th Cir. 1990) ; Lowe, 328 F.Supp.2d at 1125 ; In re Waldrop, 2016 WL 6090849 (Bankr. W.D. Okla. 2016).

The Court has the inherent power to disqualify counsel "where necessary to preserve the integrity of the adversary process." Lowe v. Experian, 328 F.Supp.2d 1122 (D. Kan. 2004). Motions to disqualify counsel are committed to the court's sound discretion. Parkinson v. Phonex Corp., 857 F.Supp. 1474 (D. Utah 1994) ; Beck v. Board of Regents of the State of Kansas, 568 F.Supp. 1107 (D. Kan. 1983) (the court should not act unless "the offending attorney's conduct threatens to ‘taint the underlying trial’ with a serious ethical violation."); Greenebaum–Mountain Mortgage Co. v. Pioneer National Title Insurance Co., 421 F.Supp. 1348, 1353–54 (D. Colo. 1976).

A motion to disqualify must be decided on the specific facts of each case, and the court must carefully balance the interest in protecting the integrity of the judicial process against the right of a party to have the counsel of its choice. Lowe v. Experian, 328 F.Supp.2d 1122 (D. Kan. 2004). A functional analysis is required. SLC Limited V v. Bradford Group West, Inc., 999 F.2d 464, 468 (10th Cir. 1993) ; Polly Software International, Inc. v. Su, 880 F.Supp. 1487, 1494 (D. Utah 1995).

An evidentiary hearing, is not required when the parties, as the Court finds here, have fully briefed the issue of disqualification, and there are no disputed issues of fact or there is otherwise no need for any additional evidence to be presented to the Court. Weeks v. Independent School District No. I–89 of Oklahoma County, 230 F.3d 1201, 1212 (10th Cir. 2000). Howe...