WWMV, LLC
MEMORANDUM OPINION
Pеnding before the court is an application to employ special counsel under
For the reasons stated herein, the court will grаnt the Trustee‘s application.
I. BACKGROUND
On October 24, 2023, three of the Debtor‘s creditors filed an involuntary Chapter 7 petition against the Debtor. The Debtor consented to the bankruptcy petition through its response, and the court entered an order for relief on November 16, 2023. Notably, the Debtor‘s members are two limited liability companies. RWMV, LLC (“RWMV”), owns 51% and CMDC, LLC (“CMDC”), owns 49% of the Debtor, respectively. Shawn P. George has a 25% ownership interest in RWMV and a 33 1/3% ownership interest in CMDC, although his stake in both entities is a non-voting interest. Additionally, Mr. George is a personal guarantor on certain liabilities of the Debtor, and he is a creditor of the Debtor, RWMV, and CMDC.
On November 28, 2023, the Trustee was appointed to administer the bankruptcy estate. Among the Debtor‘s assets is the civil action pending in the Southern District of West Virginia. On February 2, 2024, the Trustee filed an application to employ George as special counsel. George‘s anticipated role is to investigate and litigate issues relating to Civil Action Nо. 2:16-cv-10711 pending in the United States District Court for the Southern District of West Virginia styled Blackhawk Land and Resources, LLC, and Panther Creek Mining, LLC, v. WWMV, LLC, and RWMV, LLC (“Civil Action”).
On February 12, 2024, Broun filed a protective objection to the Trustee‘s application reserving the right to object later. On February 24, 2024, Blackhawk filed an objection to the Trustee‘s application. In addition to objecting on the merits, both Broun and Blackhawk requested that the court order George to turnover the Debtor‘s legal files to the Trustee.
On March 11, 2024, thе court held a hearing on the matter. Although the Trustee inadvertently referenced
II. DISCUSSION
The Trustee contends that George‘s employment is necessary and in the best interest of the estate because George has represented the Debtor in the Civil Action since its inception in 2016 and provides a certain level of expertise. The continuity of representation will result in significant cost savings for the bankruptcy estate. The Trustee further believes that the employment application is appropriate under
Blackhawk contends that George‘s involvement with the Debtor, RWMV, and CMDC creates an interest adverse to the estate and an actual conflict of interest. Specifically, Blackhawk argues that George‘s financial interests are so intertwined that his representation would be materially limited, especially given that George represents both the Debtor and codefendant RWMV in the Civil Action. Additionally, Blackhawk argues that this employment application should be reviewed under
Section 327 of the Bankruptcy Code governs the trustee‘s employment of professionals. Section 327(a) allows for the employment of various рrofessionals, including attorneys, “that do not hold or represent an interest adverse to the estate, and that are disinterested persons” to assist the trustee in conducting the case.
Examining those four elements here, the court finds that the Trustee‘s application to employ George is appropriate under
A. § 327 Analysis and Adverse Interest
Congress did not define adverse interest in the Bankruptcy Code. It generally exists when a professional is compromised by “(1) an economic interest tending to lessen the value of the estate, (2) any interest that would cause a dispute in which the estate is a rival claimant, or (3) a predisposition giving rise to a bias against the estate.” In re James F. Humphreys & Assocs., L.C., 547 B.R. 190, 194 (Bankr. S.D.W. Va. 2016). Although adverse interest language is included in both
For instance,
Removing the disinterestedness requirement relaxes the standard for determining conflict. Section 327(e) requirеs counsel to have previously represented the debtor. This all but ensures special
Limiting the scope of representation narrows the conflict analysis to a specific matter. Section 327(a) governs representation of the trustee generally in administering the estate, while
Aligning interests between the estate and the prospective employee relating to the specific matter in question is one determination courts use to allow employment under
Adverse interests or conflicts must be more than speculative to justify disqualification under
The “adverse interest” referenced in section 327(e) refers to either an actual or a reasonably probable conflict of interest.
However, conflicts based purely on conjecture or mere speculation do not necessarily warrant an attorney‘s disqualification as section 328(c) of the Code can be used as a safeguard to protect estates if potential conflicts ripen into actual adverse interests.
In re J.S. II, L.L.C., 371 B.R. at 321; In re Humphreys, 547 B.R. at 195 (granting application under
Conflict analysis under state rules of professional conduct varies depending on which subsection of
Rule 1.7 of the West Virginia Rules of Professional Conduct prevents representation when it (1) is “directly adverse” to another client, or (2) creates “significant risk” that the representation will be “materially limited.”
B. Additional Safeguards and Public Policy
In addition to relaxing the standard of conflict analysis and narrowing the scope of representation, the Bankruptcy Code provides additional safeguards to protect the estate and the integrity of the court. “It bears noting that retention under sectiоn 327(e) is merely the first step if [special counsel] wishes to obtain compensation for services rendered.” In re J.S. II, L.L.C., 371 B.R. at 323 (referencing fee applications). Compensation is subject to a second look by the court before it may be approved. In re D‘Angelo, No. BR 21-21903-JAD, 2022 WL 1010047, at *2 (Bankr. W.D. Pa. Apr. 4, 2022). This second look is facilitated by the fee application process.
Section 328 provides limitations on compensation of professionals. Specifically,
Special counsel has а continued duty to disclose even after employment has been approved by the court. Indeed, many courts caution that failure to disclose both timely and completely could result in denial of fees or termination of employment. In re Statewide Pools, Inc., 79 B.R. at 315 (approving employment “does not foreclose challenge” to continued employment); In re J.S. II, L.L.C., 371 B.R. at 323 (special counsel will “risk total denial of any compensation” if an adverse interest develops during its representation and disclosures are not made timely); In re D‘Angelo, 2022 WL 1010047, at *2 (approving employment “does not establish a right to be paid”); In re AroChem Corp., 817 F.2d 175, 183 (1st Cir. 1987) (if the judge were to later perceive a materially adverse interest on the part of special counsel, some or all fees may be disallowed); In re MidwayMotor Sales, Inc., 355 B.R. at 36 (the court may disqualify counsel or deny fees if an adverse interest or actual conflict arises in the future).
There are strong public policy considerations in allowing a party its counsel of choice. Indeеd, “courts have long held that bankruptcy estates may select their professionals ‘without interference from creditors.’” In re D‘Angelo, 2022 WL 1010047, at *3; In re Diamond Mortg. Corp. of Illinois, 135 B.R. 78, 92 (Bankr. N.D. Ill. 1990) (recognizing the “inherent right of individuals or entities seeking legal services to employ the counsel of their choice”). The trustee is “generally given a wide berth in selecting a lawyer” and should be deprived of that right “only in the rarest of cases.” In re Humphreys, 547 B.R. at 193.
C. Analysis
Here, George‘s interests do not create an actual conflict of interest or an interest adverse to the еstate within the meaning of
Mr. George has a minority ownership interest in both members of the Debtor, RWMV and CMDC. He is not able to vote or impact the corporate actions of either entity, let alone the Debtor. As represented by the Trustee and George, thе Debtor‘s interests are perfectly aligned with RWMV in the Civil Action. Any personal interest George has in the outcome of the Civil Action would therefore also be perfectly aligned. There have been no crossclaims filed in the Civil Action and no indication as to any diverging interests between the Debtor and RWMV.
Blackhawk has alleged several adverse interests on the part of Mr. George, including collecting money for himself on his claims against the Debtor from the proceeds of the Civil Action. Not only does this fall outside the scope of his representation in the Civil Action, it demonstrates an alignment of interests courts have used to approve
Another alleged adverse interest is Mr. George‘s motivation to avoid any causes of action the estate may have against him, presumably by acquiring favor from the
Other possible сonflicts identified by Blackhawk center around avoiding liability on guaranties. However, any strategies employed in the Civil Action would be with the Trustee‘s knowledge and approval. See id. (potential for settlement is not fatal to
The Trustee is a competent attorney with many years of experience, including as a trustee in coal cases. The Trustee is the one making decisions for the bankruptcy estate, not Geоrge. In the role of special counsel, George truly is a hired gun as contemplated in Polaroid, retained to handle “the continuance of a pre-petition engagement to a conclusion on its merits under its governing substantive law.” In re Polaroid, 424 B.R. at 452.
If he wasn‘t already, the Trustee is acutely aware of the potential conflicts articulated by Blackhawk through the disclosure process and the lengthy arguments that followed. In making decisions on how to proceed with the litigation in the Civil Action, including evаluating any type of potential settlement, the court expects the Trustee to act as he would in any other situation, that being with the best interest of the estate in mind.
In deferring to the Trustee‘s choice of representation, the court relies on more than just his competency and experience. George, as well as any other professional employed by the estate, has a continued duty to disclose any conflicts or adverse interest that may arise or develop even after being initially approved. If any new or conflicting information would come to light, the court would examine it to determine if disqualification is appropriate. Compensation requires a second look where the court may reduce or disallow fees to counsel. The court is confident that George is aware of this risk.
D. In re Roper & Twardowsky
Blackhawk relies heavily on In re Roper & Twardowsky, LLC, 566 B.R. 734 (Bankr. D.N.J. 2017) in its arguments regarding the existence of adverse interest on the part of special counsel and the criteria warranting а
Roper & Twardowsky is a case about rights to settlement proceeds between the debtor and several law firms. Id. at 738. On December 4, 2015, the debtor voluntarily filed Chapter 11 Bankruptcy. Id. This filing was roughly one month after the final state court claims were paid, leaving the only remaining funds designatеd for attorneys’ fees and costs. In re Roper & Twardowsky, LLC, No. 16-5485, 2016 WL 7322787, at *1 (D.N.J. Dec 14, 2016). Approximately two months later the matter was converted to a Chapter 7 case. Id.
In finding cause to convert under
The Chapter 7 Trustee filed an application to employ Roper & Thyne, LLC, as special counsel. Id. at 738. Ms. Roper and Mr. Thyne were equity holders and principals of the debtor. Id. Ms. Roper was also assigned as trustee to the settlement fund. Id. at 739. The court denied the application, holding the following:
[1] proposed employment would violate at least two New Jersey Rules of Professional Conduct, that dealing with conflicts of interest, and that generally prohibiting a lawyer from acting as advocate at trial in which he was likely to be necessary witness; [2] trustee failed to show that purpose for which he sought to employ attorneys, to assist him in objecting to proofs of claim, was “special” purpose; [3] trustee failed to show that his employment, as special counsel to trustee, of attorneys who were principals in debtor/law firm was in “best interest of the estate”; and [4] attorneys were not disinterested and suffered from conflicts of interest that foreclosed their employment pursuant to bankruptcy statute governing employment of estate professionals in general.
In re Roper & Twardowsky, 566 B.R. at 734.
The court determined that the proposed employment application was not proper under
Blackhawk argues that “[t]he court in Roper & Twardowsky found the roles of counsel as both lawyers and interest holders in their personal capacity created conflicts under the New Jersey professional conduct rules and and [sic] adverse interests under § 327(e) of the Bankruptcy Code.” Blackhawk‘s Reply in Supp. Of Obj. 4. However, the Twardowsky Court specifically stated it did not analyze
In addition to lacking a
The Roper & Twardowsky Court disqualified special counsel under
disinterested. If the court had analyzed the facts under
III. Conclusion
George previously represented the Debtor as demonstrated by its representation in the Civil Action since 2016. George‘s representation is in the best interest of the estate because George is uniquely situated with intimate knowledge of the facts and circumstances of the Civil Action, and continuing representation provides significant savings to the estate. George‘s representation is for the special, limited purpose of litigating the Civil Action. George‘s interests do not amount to an interest adverse to the estate within the meaning of
For these reasons, the court will approve the Trustee‘s application and enter the Trustee‘s proposed order approving his application to employ George as special counsel.
David L. Bissett
United States Bankruptcy Judge