534 B.R. 569
Bankr. S.D.N.Y.2015Background
- Ampal filed Chapter 11 in 2012, converted to Chapter 7 in 2013; Alex Spizz was elected Chapter 7 trustee and originally retained Spizz Cohen as counsel.
- Bondholders (through Indenture Trustees) and Ampal’s former controlling shareholders (led by Yosef Maiman) have a long-standing adversarial relationship; bondholders financed trustee litigation via a Litigation Financing Agreement (LFA).
- Tarter Krinsky & Drogin (Tarter) represented Mishmeret and Shapira in certain matters in the Ampal case (stay litigation and matters related to the LFA) from mid-2013 until July 2014.
- Spizz joined Tarter after Spizz Cohen dissolved; Trustee moved to retain Tarter as substitute counsel under 11 U.S.C. § 327(a). Controlling Shareholders objected and cross-moved to disqualify the Trustee, alleging conflicts and Discovery Order violations.
- The court held an evidentiary hearing: Tarter’s representation of Mishmeret/Shapira had ended July 2014, invoices and testimony confirmed limited scope and duration, and a bilateral ethical screen was implemented in May 2015 to isolate former Spizz Cohen attorneys and Tarter attorneys who had represented Mishmeret/Shapira.
- The court denied disqualification, finding no present adverse interest or actual conflict under § 327, upheld the ethical screen, and declined to remove the Trustee for cause; it granted the Trustee’s retention application.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tarter holds or represents an interest adverse to the estate under § 327(a) | Controlling Shareholders: Tarter’s prior representation of Mishmeret/Shapira and role in LFA make it adverse and biased against estate | Trustee/Tarter: prior engagements ended; no present adverse interest; no confidential info transferred; ethical wall in place | Tarter does not presently hold or represent an adverse interest; retention allowed |
| Whether Tarter’s prior work creates an "actual conflict" under § 327(c) requiring disapproval despite § 327(c)’s tolerance of prior creditor representation | Controlling Shareholders: prior representation of Mishmeret/Shapira creates active competition and predisposition; conflicts counsel insufficient | Trustee/Tarter: prior work was limited, concluded months earlier; ethical screen prevents taint; no evidence of ongoing relationship or bias | No actual conflict found; § 327(c) inapplicable to disqualify here |
| Whether joining Tarter violated the Discovery Order (disclosure to Shapira or his agents) | Controlling Shareholders: Tarter is Shapira’s agent; Trustee’s association with Tarter makes Trustee an agent too, breaching order | Trustee/Tarter: Tarter’s representation of Shapira ended; ethical wall and restricted access prevent disclosures; no evidence of disclosure | No violation: Tarter not Shapira’s agent now; ethical wall and safeguards rebut presumption of sharing confidences |
| Whether Trustee should be removed for cause under § 324 based on conflicts, failure to pursue Interference/Gadot claims, or Discovery Order breach | Controlling Shareholders: Trustee’s affiliation with Tarter and refusal to pursue certain claims show bias or cause for removal | Trustee: exercised business judgment after investigation; claims (Interference/Gadot) are speculative or lack merit; will retain conflicts counsel if needed; no fraud or injury shown | Removal denied: no showing of fraud or injury; trustee’s business judgment appropriate; disqualification would harm estate administration |
Key Cases Cited
- Bank Brussels Lambert v. Coan, 176 F.3d 610 (2d Cir.) (adverse-interest/disinterestedness standard under § 327 and § 327(c) context)
- In re AroChem Corp., 176 F.3d 610 (2d Cir.) (definition and present-tense focus of "adverse interest" inquiry under § 327)
- In re Diva Jewelry Design, Inc., 367 B.R. 463 (Bankr. S.D.N.Y.) (limited prior representations and confidential-information analysis in retention context)
- In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y.) (analysis of adverse interest and conflicts for retention)
- Hempstead Video, Inc. v. Village of Valley Stream, 409 F.3d 127 (2d Cir.) (ethical screens can rebut presumption of shared confidences)
- In re M.F. Global Inc., 464 B.R. 594 (Bankr. S.D.N.Y.) (presumption that associated attorneys share client confidences discussed)