Opinion
Bankruptcy No. 01-32215DWS, Adversary No. 02-0332
June 16, 2003
MEMORANDUM OPINION
Before the Court is the Motion of the Defendants William Dawley ("Debtor") and Judith Dawley ("Judith" and together with Debtor, "Defendants") to Disqualify James Golden, Esquire and His Law Firm ("Golden") from Acting as Counsel to the Trustee (the "Motion"). After a hearing held during which argument was presented in support and against the Motion, I asked counsel for Defendants Gary Lightman, Esquire why the relief sought in the Motion was not foreclosed by § 327(c) of the Bankruptcy Code as Golden contended in his Answer to the Motion. Not being persuaded by the response to the query and being advised by Lightman that case law supported his view, I invited him to submit a legal memorandum which he has now done. Having reviewed the memorandum in the context of the stipulated facts of this case, I will deny the Motion finding no conflict of interest arising from Golden's representation of the Trustee and the creditor Estate of Harris.
BACKGROUND
The relevant facts are not disputed. William Dawley filed a petition under Chapter 7 on August 29, 2001. Christine Shubert was appointed interim Chapter 7 trustee and in the absence of an election under § 702 became the permanent Chapter 7 trustee. 11 U.S.C. § 701. The Estate of Harris ("Harris") is the principal, and other than a secured claim in favor of Ford Motor Credit, the only creditor listed in the Debtor's Schedules with an unsecured claim in the amount of $180,000 based on a final judgment secured in the Court of Common Pleas of Philadelphia County on June 9, 2000. The Schedules filed at the inception of the case have never been amended.
I may also take judicial notice of the docket entries in the main and adversary cases. Fed.R, Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017. See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D. Ill. 1993); In re Paolino, 1991 WL 284107, at *12 n. 19 (Bankr. E.D. Pa. 1991); see generally In re Indian Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995). While a court may not take judicial notice sua sponte of facts contained in the debtor's file that are disputed, In re Augenbaugh, 125 F.2d 887 (3d Cir. 1942), it may take judicial notice of adjudicative facts "not subject to reasonable dispute . . . [and] so long as it is not unfair to a party to do so and does not undermine the trial court's factfinding authority." In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir. 1995) (citing Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules). Moreover, "factual assertions in pleadings, which have not been superceded by amended pleadings, are judicial admissions against the party that made them.Larson v. Gross Bank, 204 B.R. 500, 502 (W.D. Tex. 1996) (statements in schedules). See also In re Musgrove, 187 B.R. 808 (Bankr. N.D. Ga. 1995) (same); In re Leonard, 151 B.R. 639 (Bankr. N.D.N.Y. 1992) (same). In that vein, I rely on certain undisputed facts memorialized in the Joint Pretrial Statement filed by the parties on April 1, 2003.
The Summary of Schedules actually evidence no other claim but that of Harris. Moreover, the docket indicates that Ford's debt was reaffirmed. Doc. No. 18.
After securing the judgment, Harris brought a fraudulent conveyance action on August 13, 2001 against Debtor and Judith Dawley, his wife, pursuant to state fraudulent transfer law. 12 Pa. C.S.A. § 5404. A hearing was scheduled for October 30, 2001 but was never held because Debtor filed the instant bankruptcy on August 29th.
On December 12, 2001 the Trustee filed an Application to Employ the Law Firm of Hamburg Golden, P.C. as Special Counsel for the purpose of bringing an action to avoid fraudulent transfers pursuant to 11 U.S.C. § 544, 548 and applicable state law. That application disclosed Golden's representation of Harris. It further averred that while Golden was an interested party through its representation of Harris, Harris was the only creditor and there was no objection by the trustee. Relying on § 327(c), the Trustee requested approval of the Application and it was granted without objection. Doc. No. 15. It is that Order that is now being collaterally attacked by the Defendants.
At the present time, this action is ready for trial. A joint pretrial statement has been filed and because Defendants demanded a jury trial, at the request of the Court, counsel has filed proposed jury instructions and interrogatories. While there have been the usual discovery and other pretrial motions one would expect in vigorously contested proceedings, Golden and Lightman have been engaged in a generally cooperative effort to bring this case to trial. It was therefore with considerable surprise that I entertained the instant Motion which avers no newly discovered fact that would give rise to its tender. Rather Defendants' sole basis is that Golden's representation of both the Trustee and Harris presents an impermissible potential and actual conflict which mandates his disqualification.
Lightman was not Debtor's original attorney rather appearing in the adversary case initially on behalf of Judith when her original attorney withdrew in March 2002. His motion to be substituted as Debtor's counsel was filed on July 3, 2003.
DISCUSSION I.
Section 327(c) of the Bankruptcy Code was expressly amended in 1984 to address the circumstances presented by this contested matter. Under the prior iteration of § 327, a person was not disqualified from representing a trustee solely because of his representation of a creditor provided that while employed by the trustee, he did not represent the creditor in connection with the case. Under the superceded law, Golden could not have represented the Trustee because he is simultaneously representing Harris. Presumably the lack of wisdom of this per se rule was recognized and § 327(c) now provides:
In a case under chapter 7, 12, 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 or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest
11 U.S.C. § 327 (c). Thus, absent an objection by another creditor or the United States trustee and a determination that the dual representation constitutes an actual conflict, the person is not disqualified.
This Motion is totally devoid of any merit as neither of the two requirements have been met. Neither a creditor nor the United States trustee objected to the Application, and there is no actual nor even potential conflict present. Indeed the interests of Harris and the Trustee administering the Debtor's estate are congruous. As noted by the Court in In re Development Corp. of Plymouth, Inc., 283 B.R. 464, 468 (Bankr. E.D. Mich. 2002), "where the interest of the special counsel and the interest of the estate are identical with respect to the matter for which special counsel is retained, there is no conflict and the representation can stand." In Development Corp. and cases cited therein, as here, any recovery in the adversary proceeding would increase the amount available to creditors. Therefore without regard to the question of standing, there is no actual or potential conflict and absolutely no basis to disqualify Golden. Indeed assuming there were other creditors to share in the recovery (although there is no evidence of same), Golden's knowledge of the facts and involvement in the state court fraudulent conveyance action may inure to the benefit of the estate. In that sense, far from representing an adverse interest, Golden represents a beneficial interest.
Moreover, it is not clear to me that § 327(c) would apply in this instance in any event since Golden is not the Trustee's general counsel but only special counsel appointed to handle this adversary proceeding. Schwartz v. Prudential Insurance Co. of America, 1999 WL 97939 (Bankr. E.D. Pa. Feb. 19, 1999) (citing cases including In re Jefsaba. Inc., Bankr. No. 91-23043DWS (Bankr. E.D. Pa. Dec. 1, 1994) decided by the undersigned). See also In re Fondiller, 15 B.R. 890 (9th Cir. 1981) (finding under the superceded statute that special counsel was not subject to the prohibition of representing both the trustee and a creditor simultaneously).
Section 327(c) has been construed as drafted to deny standing thereunder to debtors. E.g., In re Passam, Inc., 2000 WL 33710265 (Bankr. D.S.C. April 19, 2000); In re Pappas, 216 B.R. 87 (Bankr. D. Conn 1997): In re Erdman Jr., 1988 WL 1015947 (Bankr. D. ND. 1988).
When pressed as to the consequences of this perceived conflict, Defendants contended that using Harris' counsel made a settlement harder to achieve since Harris had incurred legal expenses in the state court that he wanted to recoup. Obviously Harris's judgment (perhaps with some interest) serves as a cap on his recovery so what the Defendants complain of is the ability to settle at a discount. This interest is clearly unique to the Debtor. In In re Erdman, 1988 WL 1015947 (Bankr. D.N.C. 1988), the Court made clear that an objection under § 327(a) upon which Debtor relies here, only obtains when the attorney holds an interest adverse to the estate, not an interest adverse to the debtor. In Nisselson v. James Wong et al (In re Best Craft General Contractor and Design Cabinet Inc., 239 B.R. 462, 469-70 (Banlkr. E.D. N.Y. 1999), the defendants also argued that the trustee's counsel prosecuting a fraudulent conveyance action "labors under a confusion of loyalties which distorts settlement negotiations" by reason of the pendency of a state court action it brought against the debtor on behalf of its creditor client. The court found the argument unconvincing, stating that it was "unaware of an authority, nor have the [defendants] cited any, which would support the contention that refusing a proposed settlement offer as too low could some how subject counsel to disqualification." Debtor's counsel neither recognizes this case nor cites any contrary authority.
Aside from a series of string citations lifted wholesale from the primary opinion on which Defendants rely, I am asked to find support for the Motion in two opinions quoted at some length in Defendants' memorandum. First, the Defendants offer up In re Cook, 223 B.R. 782 (10th Cir. BAP) for the proposition that debtors may raise the conflict notwithstanding the limiting language of § 327(c). Therein the court noted that "the requirements of § 327(a) are threshold requirements to be met even if § 327(c) is implicated." However, it then noted that § 327(c) addresses the situation where dual representation is the sole reason advanced for disqualification and the professional is otherwise qualified. . . ." Id. at 790 (emphasis added). In Cook, dual representation was not the sole reason for the disqualification. As the court pointed out, it was concerned about the attorney's representation of the trustee in four related cases, and the terms of a settlement agreement and contingent fee arrangement which had been belatedly disclosed. See also In re Development Corp. of Plymouth, Inc., 283 B.R. at 468 (section 327(c) provides only that representation of a creditor is not alone sufficient grounds for disqualification; it does not preempt the more basic requirements of subsection (a).) Here the only basis for the Motion is Golden's dual representation of the Trustee in this adversary case and the creditor who will be the main beneficiary of any recovery.
I have read those opinions and find them not to the point.
This is a bankruptcy appellate panel decision, not an opinion of the circuit court as cited.
It is this principle that Debtor relies upon to assert standing to bring this motion. However, his motion is not based on § 327(a) but rather subsection (c) since the gravamen of his complaint is the dual representation which has been carved out of subsection (a).
When I inquired of Lightman as to how this dual representation presented a conflict, he was adamant that it was one just by nature of the different parties being represented. He could not, and does not in his brief, explain the function of § 327(c) if his interpretation of the statute is correct. Rather he refers to a decision of this Court, In re Greater Pottstown Community Church, 80 B.R. 706 (Bankr. E.D. Pa. 1987) (Scholl, J.). Pottstown involved a request for compensation from the Chapter 7 estate by the debtor's counsel. In denying same, the facts reflect that the attorney, like the attorney in Cook, was disabled by far more than mere dual representation. The attorney who also represented various creditors had never been appointed as counsel to the debtor and thus his conflicts had never been disclosed. The failure to seek appointment in and of itself was sufficient to deny compensation but the Court went on to note that "so strict is the policy of avoiding conflicts of interest that general counsel for a DIP or a trustee may not be appointed unless (s)he is a "disinterested person." Id. at 710 (emphasis added). The Court expressly notes a case allowing closely related counsel to act as special counsel only. It is in this context that Defendants quote the Court's comment that "a prohibited apparent or actual conflict arises perforce when (1) counsel for the trustee represents a creditor simultaneously; and (2) counsel for a debtor or DIP, whose interests are necessarily diverse from those of a creditor, as opposed to an independent trustee, has represented a creditor in the past, or, what is even more objectionable, purports to represent a creditor in the same proceeding in which he represents the DIP." Id. Obviously the comments about representation of trustees and creditors are dicta since the case concerned representation of a debtor and creditor, a far different scenario. Moreover, the court was focused on general counsel, which unlike special counsel, must be disinterested. Indeed subsequent decisions of the author of the Pottstown opinion refute the principle that Debtor derives from it. In Schwartz v. Prudential Insurance Co. of America (In re Kridlow). 1999 WL 97939 (Bankr. E.D. Pa. Feb. 19, 1999), Judge Scholl relied on § 327(e) to deny a disqualification motion where the trustee had hired the former counsel of the guardian of the injured pedestrian who had secured the judgment against the debtor (i.e., a creditor) as special counsel to prosecute an adversary proceeding. Applying that reasoning, he would presumably deny the instant motion.
As it turned out, Judge Scholl later recognized that § 327(a) does not require a debtor to secure court approval of his engagement, leaving the force of his comments in significant doubt. In re Trinsey, 115 B.R. 828, 831 (Bankr. E.D. Pa. 1990).
II.
Given the clarity of the law in this area, Golden responded to the Motion by demanding that it be withdrawn absent which sanctions would be requested. Lightman failed to do so which necessitated Golden's preparation of an answer and appearance at the hearing Lightman scheduled on the Motion. Golden's request for sanctions is contained in his response. At the hearing, finding Lightman's position unsupportable based on my knowledge of the law, I directed him to address the sanctions' demand in his supplemental brief. He has done so.
Lightman contends that an award of sanctions is not procedurally or substantively proper. I disagree with the former position but agree with the latter. I find that the law could not have been clearer as to the absence of any conflict in the dual representations undertaken by Golden. Defendants' claims and contentions are not warranted by existing law and provide not the slightest basis for the extension, modification or reversal of existing law. Contrary to Defendants' memorandum, neither this Bankruptcy Court nor other courts have disqualified counsel in similar circumstances. Moreover, the raising of this issue some months after Golden was approved with full disclosure on notice to Defendants and other interested parties and on the eve of trial raises issues of good faith. This diversion from the path to trial has not only delayed that day but caused unnecessary expense to the estate and wasted time of the Court. However, because Defendants' accurately note that the request for sanctions was made as part of the response to the Motion and thus is not consistent with the literal requirements of Rule 9011(c)(1) that requires a sanctions motion to be filed separately, I am not in a position to rule on that request presently. To avoid further unnecessary expense, Golden may renew his demand by filing a motion which attaches the memorandum filed in support of his answer, supplemented only to the extent he believes necessary. No hearing will be held on the sanctions motion.
While the Rule's purpose of requiring a separate motion would appear to have been met here where the Debtor has had an adequate opportunity to respond to the sanctions demand by filing a post-hearing brief, the Debtor is correct that my directive to address the sanctions issue did not take the form of a written order describing the conduct that appears to violate subsection (b).
An Order consistent with this Memorandum Opinion shall be entered.
ORDER
AND NOW, this 16th day of June 2003, upon consideration of the Motion of the Defendants William Dawley and Judith Dawley to Disqualify James Golden, Esquire and His Law Firm from Acting as Counsel to the Trustee (the "Motion"), and after notice and hearing and review of Defendants' supplemental memorandum, and for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED that the Motion is DENIED; And it is further ORDERED that Plaintiffs request for sanctions is DENIED WITHOUT PREJUDICE. If the request for monetary sanctions is being pressed, a motion shall be filed accompanied by a bill of costs for defending the Motion. Defendants may file a response within 15 days of service of the motion. No hearing will be held.