Lightning Dock Geothermal HI-01, LLC, 17-10567

Background

Debtors (Lightning Dock Geothermal HI-01, LLC and related entities) operate a geothermal power plant and filed chapter 11 on March 14, 2017; Cyrq Energy, Inc. is the corporate parent and DIP lender.
The Kaishan Entities sold the plant’s generating equipment prepetition and purchased about $20 million of secured notes owed by Debtors; they are the largest secured/unsecured creditors and are adverse to Debtors and Cyrq.
Prepetition litigation arose over alleged defects in Kaishan equipment; Modrall previously represented Debtors and/or Cyrq in several of these matters (the “Pending Litigation”).
Debtors retained Walker & Associates as general bankruptcy counsel and sought to employ Modrall as special counsel under 11 U.S.C. § 327(e) for a limited scope: Pending Litigation, water rights, operations/development issues, administrative proceedings, certain claims objections, and matters involving Kaishan.
Kaishan objected, arguing Modrall is not disinterested and has a disqualifying conflict because Modrall also represents Cyrq and because of a prepetition subordination agreement involving Cyrq.
The bankruptcy court ruled without an evidentiary hearing that Modrall may be retained as special counsel for the limited scope; any future material conflict that ripens may be revisited.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Modrall may be employed under § 327(e) despite prior representation of debtor/related parties	Debtors: § 327(e) permits prior counsel to be retained for a special, limited purpose if in the estate’s best interest and no adverse interest exists for the specific matters	Kaishan: Modrall is conflicted because it also represents Cyrq (adverse to Kaishan) and thus is not disinterested; subordination agreement creates a disqualifying conflict	Approved retention under § 327(e) for the narrow scope; representation of Cyrq does not now create a disqualifying conflict; subordination argument insufficient at this time
Whether proposed duties improperly overlap with general bankruptcy representation	Debtors: Modrall’s duties are limited and exclude general administration, plan drafting, and core case conduct (Walker & Associates remains general counsel)	Kaishan: Concern that Modrall will assist in case conduct and plan-related matters, exceeding § 327(e) limits	Court found proposed scope sufficiently limited and not constituting representation in conducting the case
Whether Modrall could be authorized to pursue claim objections broadly	Debtors: May litigate certain claim objections tied to the limited scope	Kaishan: Allowing broad claim-objecting authority would give Modrall improper power	Court limited Modrall: may file/litigate specific objections within scope but not general investigation/objecting authority
Whether state ethics rules bar dual representation of debtor and its parent	Kaishan: Rule forbids representing materially adverse clients; simultaneous representation of Cyrq and Debtor violates ethics	Debtors: Dual representation is permissible for the narrow matters and does not create an adverse interest to the estate on those matters	Court: No present violation; simultaneous representation does not presently disqualify Modrall; may revisit if a serious conflict arises

Key Cases Cited

In re Running Horse, LLC, 371 B.R. 446 (Bankr. E.D. Cal. 2007) (articulates § 327(e) requirements for special counsel)
In re Neuman, 138 B.R. 683 (S.D.N.Y. 1992) (special counsel under § 327(e) should not be approved if representation would violate ethical duty to decline prohibited conflicts)
In re Microwave Products of America, Inc., 104 B.R. 900 (Bankr. W.D. Tenn. 1989) (ongoing attorney relationship with debtor’s parent does not necessarily create a § 327(e) conflict)
In re Woodworkers Warehouse, Inc., 323 B.R. 403 (D. Del. 2005) (special counsel may be employed where duties do not include negotiating, formulating, or seeking confirmation of a plan)
In re Tidewater Memorial Hospital, Inc., 110 B.R. 221 (Bankr. E.D. Va. 1989) (§ 327(e) special purpose should not relate to the debtor’s reorganization or conduct of the case)