561 B.R. 380
Bankr. E.D. Va.2016Background
- Chapter 7 trustee H. Jason Gold (also a member of Nelson Mullins) sought court approval to employ Nelson Mullins Riley Scarborough LLP to handle sale of debtor’s real property at 728 N. Watford Court, Sterling, VA.
- Nelson Mullins represents several creditors of the estate, including secured lenders Seterus and Specialized Loan Servicing, who hold first and second deeds of trust on the Watford Court property.
- Trustee’s engagement would include analyzing and resolving lien issues, drafting the sale motion, and attending sale-related hearings.
- The trustee disclosed his firm’s representation of those creditors but did not initially disclose that those creditors hold liens on the specific property; the court required the trustee to address that point at hearing.
- Trustee filed a motion stating both secured liens would be paid in full at closing; trustee’s counsel relied on 11 U.S.C. § 327(c) to contend dual representation was permissible.
- The court concluded that Nelson Mullins’ simultaneous representation of the secured creditors and the estate created an actual conflict with respect to investigating and challenging liens, and denied the employment application.
Issues
| Issue | Trustee's Argument | Creditors'/Opponent's Argument | Held |
|---|---|---|---|
| Whether trustee may employ a law firm that represents secured creditors who hold liens on the property the trustee seeks to sell | §327(c) permits employment of a creditor’s counsel so long as no actual conflict exists; trustee argued no problem exists here | Dual representation creates an actual conflict because trustee’s counsel must independently assess and potentially challenge creditor payoffs and lien validity | Denied: court found an actual conflict because the trustee’s duties to investigate liens actively compete with the creditors’ interests |
| Whether absence of objection by other parties cures potential conflicts under §327(c) | If no creditor or U.S. Trustee objects, approval should be allowed | Court must independently assess conflicts; lack of objection does not mandate approval | Denied: court exercised independent review and held absence of objection is not dispositive |
Key Cases Cited
- In re Johnson, 312 B.R. 810 (E.D. Va. 2004) (discusses §327(a) and §327(c) and the ‘‘actual conflict’’ standard)
- In re BH & P Inc., 949 F.2d 1300 (3d Cir. 1991) (framework for evaluating conflicts of interest in bankruptcy)
- In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998) (focus on divided loyalties and whether representation may color professional independence)
- In re Interwest Bus. Equip., Inc., 23 F.3d 311 (10th Cir. 1994) (confirming disqualification if joint representation creates an actual conflict)