599 B.R. 7
Bankr. W.D. Ky.2019Background
- Two related debtors (M & P Collections, Inc. and F & M Law Firm, P.S.C.) filed Chapter 11 petitions and sought joint administration; their cases were not substantively consolidated.
- M & P leased employees to F & M under a services agreement; F & M listed M & P as a creditor for about $1.15M (valid and undisputed).
- Debtors sought nunc pro tunc approval to employ Kaplan Johnson Abate & Bird, LLP (KJAB) as general bankruptcy counsel; engagement called for $25,000 retainer from M & P and $10,000 from F & M, but KJAB actually received $35,000 from M & P.
- The U.S. Trustee objected, arguing dual representation posed an actual conflict because one debtor was a creditor of the other and M & P funded both retainers; cited In re WM Distribution in support.
- The court found current estate realities make distributions to unsecured creditors unlikely (secured creditors are undersecured by several million; remaining assets largely Chapter 5 claims), so no actual conflict presently exists.
- Court approved KJAB’s employment, adopting a fact-driven “wait-and-see” approach, requiring KJAB to notify the court/UST if an actual conflict later arises and prohibiting KJAB from acting on intercompany disputes without court direction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether KJAB has an actual conflict under §327/§1107 by representing both debtors when one debtor is a creditor of the other | UST: A debtor owing another debtor creates an automatic disqualifying conflict; potential recoveries could pit estates against each other | Debtors/KJAB: No actual conflict now; interests align (liquidation), and potential future conflicts don’t mandate disqualification | No actual conflict exists now; employment approved subject to future reevaluation |
| Whether counsel’s prior or concurrent representation of a creditor (M & P paid both retainers) requires disqualification under §327(c) | UST: Payment by M & P of F & M’s retainer undermines KJAB’s loyalty to F & M | Debtors/KJAB: §327(c) permits employment despite counsel representing a creditor unless an actual conflict exists and is shown | Payment raises concern but not dispositive; court required disclosure/notice and restricted counsel from acting on intercompany disputes |
| Whether potential future recoveries (e.g., Chapter 5 claims) create present disqualification | UST: Likelihood of recoveries means conflicts may arise; counsels should be disqualified now | Debtors/KJAB: Potential conflicts are insufficient; courts should apply fact-driven analysis and wait until an actual conflict materializes | Potential conflicts alone are insufficient; court will reassess if actual conflict materializes |
| Whether WM Distribution requires per se disqualification in inter-debtor creditor situations | UST: Relies on WM Distribution to support bright-line rule | Debtors/KJAB: WM Distribution does not create a per se rule; cases are distinguishable (reorganization vs. liquidating estates; parties not adversarial here) | WM Distribution is distinguishable; no per se rule applied; judge adopts case-by-case approach |
Key Cases Cited
- Vouzianas v. General Star Nat. Ins. Co., 259 F.3d 103 (2d Cir.) (court should defer to debtor-in-possession's choice of counsel absent rare circumstances)
- Smith v. Arthur Andersen LLP, 507 F.3d 64 (2d Cir.) (court interference with DIP's counsel choice limited to rare cases like actual conflicts)
- Eagle-Picher Indus. v. Balbos, 999 F.2d 969 (6th Cir.) (professional employed must meet both non-adverse-and-disinterested standards)
- Interwest Bus. Equip., Inc. v. National Labor Relations Bd., 23 F.3d 311 (10th Cir.) (representation of a creditor does not automatically disqualify counsel absent an actual conflict)
- BH & P, Inc. v. Livengood, 949 F.2d 1300 (3d Cir.) (courts have latitude in determining actual conflicts; active competition between interests denotes actual conflict)
- Adelphia Communications Corp. v. Bankr. Court, 342 B.R. 122 (S.D.N.Y.) (intercompany claims between debtors do not automatically require disqualification; adopt fact-driven approach)