In Re O'Connor
- Reporters:
- ,
- Before:
- Berry
MEMORANDUM OPINION AND ORDER
Thе matter before the Court concerns an Application to Withdraw as Counsel for Magic Circle Energy Corporation and/or as Counsel for Wm. J. and Jane E. O’Connor and Request for Instructions from the Court, filed by the law firm retained on behalf of debtors, Andrews Davis Legg Bixler Milsten & Murrah (hereinafter “counsel”). After due notice to all interested parties the matter came on for hearing. At which time the Court was apprised by counsel of the circumstances surrounding the instant application. In addition to counsel, also appearing at the hearing were counsel for Wells Fargo Bank, N.A. (hereinafter “Wells Fargo”), counsel for Magic Circle Energy Corporation, and counsel for the Official Unsecured Creditors’ Commit *893 tee. After hearing statement from all parties, the Court ordered that the matter would be decided on the briefs submitted plus any further written responses the parties desired to file.
Subsequently counsel for Magic Circle Energy Corporation (hereinafter “Magic Circle”) filed its objection to any suggested withdrawal of counsel for the debtors wherein it adopted the position of counsel for the debtor estates. Counsel for the Official Unsecured Creditors’ Committee has filed a statement urging that withdrawal of counsel from its representation of Magic Circle would, at this time, be counterproductive to the effort to achieve a reorganization of Magic Circle. It is further urged by the Committee that should counsel be required to withdraw from representation of any of the debtor estates it would be in the best interests of all parties in interest that counsel withdraw from its representation of the O’Connors, and not that of Magic Circle. Wells Fargo has filed a response to the instant application wherein it fully supports counsel’s application to withdraw from its representation of Magic Circle. Furthermore, Wells Fargo has requested that any application of counsel for compensation for services rendered in its representation of Magic Circle in the bankruptcy proceeding be denied owing to what Wells Fargo perceives to be a “irreconcilable conflict of interеsts” as a result of counsel’s joint representation of the O’Connors and Magic Circle. Finally, Wells Fargo has filed a motion affirmatively requesting that counsel be disqualified from its representation of Magic Circle.
Before we proceed with our discussion on this matter we feel constrained to point out that, as we have previously stated on more than one occasion, any conflict of interest or potential for conflict of interest is best recognized by those attorneys directly involved. It is they who are in the best position to assess and determine any potential conflict, fully cognizant of the mandates and strictures of the Code of Professional Responsibility. It should not devolve to the judiciary to pontificate on the mores of legal representation, and it is with no small measure of reticence and reluctance that we issue the following opinion. With the foregoing prefatory comments firmly in mind, a brief recitation of the facts leading up to the instant application and motion is in order.
Wm. J. O’Connor is President and Chairman of the Board of Magic Circle and together with his wife Jane E. O’Connor and other immediate family members owns a controlling interest in Magic Circle. Wm. J. and Jane E. O’Connor filed Chapter 11 proceedings in bankruptcy on September 28, 1984. The largest creditor of the O’Connors is MBank Dallas, N.A. (hereinafter “MBank”).
On April 16, 1985, Magic Circle, having been unable to reach an agreement with regard to an out-of-court debt restructuring with its lender Well Fargo, instituted its reorganization proceedings.
Based on the affidavit of a shareholder of counsel it appears that counsel has represented Magic Circle for a period of years prior to the filing of its bankruptcy. Counsel had also undertaken to represent the O’Connors in their bankruptcy proceedings. Apparently it was not until immediately prior to the filing of the O’Connor bankruptcy proceedings that counsel became aware of the fact that the O’Connors owe Magic Circle approximately one million dollars. At the time counsel filed its application for employment as attorneys for the O’Connors counsel notified the Court that it represented Magic Circle; however, counsel would not undertake the representation of Magic Circle in connection with its claim against the O’Connors in the O’Con-nor proceedings and Magic Circle would be retaining, and in fact has retained, separate counsel in connection with such claim. When seeking employment as attorneys for Magic Circle in its bankruptcy proceeding, counsel disclosed its representation of the O’Connors in their bankruptcy proceedings. This Court, on April 16, 1985, entered an order approving the appointment of counsel as attorneys for Magic Circle and further authorizing the employment of separate *894 counsel to reprеsent Magic Circle with respect to its claim against the O’Connors in the O’Connor bankruptcy proceedings. Two days after we entered our order approving appointment of counsel as attorneys for Magic Circle, counsel filed an amended affidavit disclosing the fact that various members of counsel own minor shares of Magic Circle in aggregate amounts of less than 1,000 shares out of a total 12,969,626 issued and outstanding shares.
Proceeding chronologically our next area of interest concerns the months of June, July and August of this year. Based on exhibits attached to the instant application it is quite obvious that concerns of a potential conflict attributable to counsel’s dual representation engendered a substantial amount of correspondence, briefly summarized as follows:
1. June 18, 1985: letter from counsel addressed to attorney for Wells Fargo regarding initial application for interim compensation and reimbursement of expenses, requesting any objection of Wells Fargo thereto.
2. July 22 and 24, 1985: letters from counsel addressed to attorney for Official Unsecured Creditors’ Committee regarding counsel’s joint representation of the O’Connors and Magic Circle and requesting instructions regarding withdrawal of counsel from its joint representation.
3. August 1, 1985: letter from counsel addressed to attorneys for MBank requesting advice regarding withdrawal as counsel for the O’Connors and Magic Circle with resрect to an adversary proceeding to be filed against the O’Connors and Magic Circle by MBank.
4. August 1, 1985: letter from counsel addressed to attorney for Unsecured Creditors’ Committee regarding proposal concerning disqualification as objection to payment of interim compensation and reimbursement of expenses.
5. August 5, 1985: letter from attorney for Unsecured Creditors’ Committee addressed to counsel offering a “counter-proposal” to that contained in letter of August 1.
6. August 12, 1985: letter from counsel addressed to attorney for Unsecured Creditors’ Committee accepting “counter-proposal” contained in letter of August 5.
7. August 13, 1985: letter from attorney for Wells Fargo addressed to counsel 1) advising of objection of Wells Fargo to payment of interim compensation and reimbursement of expenses due to alleged representation of interests adverse to the debt- or estate; and 2) advising that absent voluntary withdrawal, Wells Fargo would move for order disqualifying counsel from its representation of Magic Circle.
8. August 14, 1985: letter from attorney for MBank addressed to counsel agreeing to retention of counsel as attorney for Magic Circle and the O’Connors, with certain provisos not material for our purposes.
We should also note that on August 5, 1985, Wells Fargo filed its objection to the applications of counsel for interim compensation and reimbursement of expenses incurred in its representation of Magic Circle and which were filed on June 18, 1985, and July 22, 1985, which objection has not yet been ruled on by this Court. The objection is based on allegations that counsel is not a disinterested person and furthermore represents an interest adverse to the interest of the estate. It is also objected that the requests are unreasonable in nature, the most notable of which is the objection that time spent in researching and investigating potential conflicts of interest should not be charged to the estate.
The position of counsel for the O’Connors and Magic Circle .can be stated as follows. While counsel does not believe a conflict exists, nor does it believe itself a disinterеsted person holding an interest adverse to the estates such as to preclude employment as counsel for the debtors pursuant to
The position of Wells Fargo is that there is an inherent conflict in representing an individual who is in bankruptcy while at the same time representing a corporation which is in bankruptcy, of which the individual is principal shareholder as well as chief executive officer. Moreover counsel may not be a “disinterested person” pursuant to
Having perhaps belabored somewhat the discussion of background events which culminated in the instant application and motion, we will now address the substantive issues, addressing first applicable sections of the Bankruptcy Code.
Employment of professional persons in a bankruptcy estate is governed by
[T]he trustee, with the court’s approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the trustee in carrying out the trustee’s duties under this title.
We will first discuss the question of whether counsel “holds or represents an interest adverse to the estate.” This coincides somewhat with Wells Fargo’s objection to the dual representation by counsel of the O’Connors and Magic Circle. We initially point out that the dual representation of an individual debtor and the corporation of which the individual debtor is a sole or major stockholder, is a circumstance which has occurred before in this district in a bankruptcy proceeding, albeit heretofore without оbjection. Most oftentimes it has occurred in the representation of an individual involved in the oil and gas industry who has formed a solely-owned corporation or one in which the individual is the controlling stockholder. As a result of machinations indigenous to the particular individual, from the perspective of savings to the respective estates through curtailment of administrative expenses, i.e. legal fees, it is advantageous that the same attorney, or firm, attempt to unravel the Gordian knot constructed by the debtor.
Wells Fargo has noted that in his capacity as officer, director and employee of Magic Circle, Wm. J. O’Connor received in 1984 the sum of $177,000.00 in the form of compensation and expеnse reimbursement and that O’Connor’s total revenue from Magic Circle in 1984 was $2,900,000.00. A *896 fortiori, O’Connor is inherently biased towards remaining as a salaried employee of Magic Circle. Given the recitation of these figures, concedely substantial in amount, we feel comfortable in stating that it appears to us that Wells Fargo has some concerns as to whether O’Connor in his role of management with Magic Circle is representing the best interests of the debtor-in-possession estate. If indeed such is Wells Fargo’s concern, the solution lies not in the disqualification of counsel from its representation of Magic Circle; rather, it lies with reliance on other sections of the Bankruptcy Code.
A further area of conflict аccording to Wells Fargo lies in the fact that inasmuch as the O’Connors are large stockholders of Magic Circle, which stock is the major asset of the O’Connor estates, an inherent bias exists with respect to the formulation of a plan of reorganization for Magic Circle wherein the equity security holders are treated preferentially, thereby concomitantly enhancing the success of the O’Connors’ reorganization. While we do not doubt that the O’Connors would enjoy seeing a Magic Circle plan of reorganization which maximizes the potential for return in favor of the equity security holders, to imply that the reorganization efforts of Magic Circle will be channeled in favor of equity security holdеrs to the exclusion of all other creditors ignores the practical reality of
Wells Fargo has cited to the Court the case of
In re Roberts,
To hold an interest adverse to the estate means (1) to possess or assert any economic interest that would tend to lessen the value оf the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate.
To represent an adverse interest means to serve as agent or attorney for any individual or entity holding such an adverse interest.
In re Roberts,
We are aware of those cases which state that once employed by a corporation a law
*897
yer owes his allegiance to the corporation and not the stockholder, director or employee of the corporation.
See, e.g., Matter of King Resources Co.,
As a final matter with respect to our discussion of the existence of a conflict of interest, Wells Fargo urges that as the O’Connors occupy the status of debtors of Magic Circle, such fact alone demonstrates adversity of interest citing
In re Roberts,
As
Roberts
is quick to point out, those changes in the Bankruptcy Code which occurred with passage of the Bankruptcy Amendments and Federal Judgeship Act of 1984, Public Law 98-353, 98 Stаt. 333 (July 10,1984) were not applicable to the
Roberts
case. Amended
In a case under chapter 7 or 11 of this title, a person is not disqualified for employment under this section solely because of such person’s employment by or representation of a creditor, unless there is objection by another creditor, in which case the court shall disapprove such employment if there is an actual conflict of interest.
Clearly counsel may represent Magic Circle in its capacity as a creditor of the O’Connors, provided there is no objection by another creditor in which case the court will need to determine that such representation involves an actual, rather than theoretical, confliсt of interest. Given Wells Fargo’s objection we would normally need inquire into the existence of an actual conflict of interest. We need not do so however, albeit our previous discussion leaves us with no doubt on the issue, due to the separate representation of Magic Circle in its claim against the O’Connors. While counsel, absent an actual conflict of interest as determined by the court, was entitled to represent Magic Circle as a creditor of the O’Connor estates, out of a plethora of caution it took the additional step of requiring Magic Circle to retain separate representation in regard to its claim against the O’Connors. Further we read Roberts as having required disqualification on a number of grounds: the corporate debtor was a creditor of an individual debtor, the other individual debtor was a creditor of the corporate debtor, the corporate debtor owed the law firm for legal services unrelated to the bankruptcy case and the law firm failed to disclose, either in its applications for appointment as counsel or in its fee applica *898 tions the existence of any of its conflicting involvements. When taken in toto the court felt compelled to require disqualification. The matter at bar differs both on the present state of applicable statutory law as well as on the facts of the case.
Having decided the issue of adverse intеrest, we turn our attention to whether counsel is a “disinterested person”.
The term “disinterested person” is defined by the Bankruptcy Code at
(13) “disinterested person” means person that—
(A) is not a creditor, an equity security holder, or an insider;
(B) is not and was not an investment banker for any outstanding security of the debtor;
(C) has not been, within three years before the date of the filing of the petition, an investment banker for a security of the debtor, or an attorney for such an investment banker in connection with the offer, sale, or issuance of a security of the debtor;
(D) is not and was not, within two years before the date of the filing of the petition, a director, officer, or employee of the debtor or of an investment banker specified in subparagraph (B) or (C) of this paragraph; and
(E) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor or an investment banker specified in subparagraph (B) or (C) of this paragraph, or for any other reason[J
The majority of Wells Fargo’s contentions as to the “disinterestedness” of counsel do not convince us that counsel is not a “disinterested person”.
With respect to the argument that counsel is a “disinterested person” owing to the fact that a shareholder of counsel was an officer and director of Magic Circle in 1982, Magiс Circle filed for reorganization under the Bankruptcy Code on April 16, 1985. As its petition was filed some three years after the resignation of the shareholder, the two year proscription of
Next Wells Fargo urges that inasmuch as this same shareholder/officer issued a opinion letter to Wells Fargo, the subject of which is currently in litigation in district court, and that in order to resolve the district court litigation Wells Fargo may be compelled to pursue counsel and/or the shareholder regarding the shareholder’s opinion letter, counsel’s disqualification from representing Magic Circle in its bankruptcy proceedings is required.
First we must note that such a hypothesis appears to be one of “disqualification on speculation”, a precept we have not heretofore seen articulated. Second, what Wells Fargo may or may not do appears to us to be the concern of the district court and is properly to be handled by that court when and if the question should arise.
Wells Fargo has further raised the issue of whether a subsidiary of Magic Circle is an investment banker under
Finally we reach our greatest area of concern: whether counsel is not a “disinterested person” due to its ownership of stock in Magic Circle, a violation of
Counsel does not deny its ownership interest in Magic Circle. It clearly revealed such interest in its disclosure of April 18, *899 1985, two days after Magic Circle’s petition for relief under Chapter 11 was filed. As stated in the affidavit of April 18, various members of counsel own interests in Magic Circle which aggregate in an amount of less than 1,000 shares out of a total of 12,969,626 issued and outstanding shares. The Court has not been provided with a schedule specifying increments of ownership; however, by way of the aforementioned affidavit of shareholder we are informed the value aggregates less than $500.00.
According to
Collier
the tests of
While the reported dеcisions regarding the issue of “disinterestedness” are voluminous, there is little on the topic of an attorney representing the debtor while the attorney is an equity security holder of the debtor. We have, however, been cited to the case of
In re Anver Corp.,
Anver
involved the application for employment as debtor’s counsel of an attorney who was an equity security holder of approximately one percent of the debtor. The court did not agree with the argument that the ownership of approximately one percent of the debtor’s stock is
de mini-mus
such as to satisfy the test of “disinterestedness”. However, the court did not rest its ruling
solely
on that issue. Rather the court found that “stock ownership was consistent with its [debtor’s attorney]
active role in the corporation.
Indeed, counsel noted that the purpose of the ownership was ‘in order to further enhance the company’s relationship with counsel’.”
In re Anver Corp.,
While we are in agreement that the tests of
Having concluded that counsel need not be disqualified from its joint representation of the O’Connors and Magic Circle due to the constraints of the Bankruptcy Code, we must now address the question of whether counsel has violated any of the provisions of the Code of Professional Responsibility, adopted in Oklahoma by way of Okla.Stat. tit. 5, ch. 1, App. 3 (1984). Wells Fargo has urged that counsel has violated Canons 1, 4, 5, 6, 7 and 9 of the Code of Professional Responsibility.
Canon 1 provides that a lawyer should assist in maintaining the integrity and competence of the legal profession. Canon 4 provides that a lawyer should preserve the confidences and secrets of a client. Canon 5 provides that a lawyer should exercise independent professional judgment on be *900 half of a client. Canon 6 provides that a lawyer should represent a client competently. Canon 7 provides that a lawyer should represent a client zealously within the bounds of the law. Canon 9 provides that a lawyer should avoid even the appearance of professional impropriety. With respect to Canons 1, 4, 5, 6 and 7, we have been presented with nothing which would indicate a violation of those Canons. Canon 9 is perhaps the most important of these due to its focus on appearances and the public perception of lawyers in general.
In applying Canon 9, a court “must view the conduct as an informed and concerned private citizen and judge whether the reputation of the Bar would be lowered if the conduct were permitted.”
United States v. Miller,
While we believe we adequately have discussed the issue of disqualification both from the standpoint of the Bankruptcy Code and the Code of Professional Responsibility, we feel compelled to comment on two other items.
The first being that which most separates the instant facts from other cases involving disqualification. Those cаses may be categorized as ones involving disqualification upon application for employment as debtor’s counsel,
see, e.g., In re Anver,
Regretably we feel compelled to comment on the allegation that the present motion to disqualify is merely a litigation tactic.
See In re O.P.M. Leasing Services, Inc.,
As a final matter, we touch briefly on the issue of counsel’s interim fee applications. Wells Fargo had sought the denial of the requested fees and expense reimbursements in toto. Our foregoing discussion disposes with Wells Fargo’s objection as it relates to the issue of disqualification. Wells Fargo was the only party objecting to the award of interim compensation. The balance of Wells Fargo’s objections will be taken up at the hearing currently scheduled for September 23, 1985, at 2:30 p.m.
Accordingly, based on all of the above the following is hereby ordered: the firm of Andrews Davis Legg Bixler Milsten & Murrah is hereby directed to continue its representation of Wm. J. O’Connor, Jane E. O’Connor and Magic Circle Energy Corporation in their respective bankruptcy proceedings; the firm of Kline and Kline is directed to continue its representation of Magic Circle Corporation with respect to its claim against the O’Connors; the motion for disqualification of Andrews Davis Legg Bixler Milsten & Murrah filed by Wells Fargo Bank shall be and hereby is, denied. The objections of Wells Fargo to the pending applications for interim compensation and reimbursement of expenses are scheduled for hearing on September 23, 1985, at 2:30 p.m., at which time the Court will consider said applications.
Pursuant to Bankr.R. 7052 the foregoing constitute our findings of fact and conclusions of law and comprise the judgment and order of this Court.