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Greene v. Informd, LLC

United States District Court, M.D. Louisiana

July 25, 2018




         Appellant-Creditor Trey Greene (“Greene”) appeals the bankruptcy court's judgment in favor of the Trustee of the Estate of Appellee-Debtor InforMD, LLC in Bankruptcy No. 17-10579 in the Middle District of Louisiana. In Order (P-17), the bankruptcy court confirmed the appointment of Special Counsel for the Estate upon application of the Trustee, Martin A. Schott (“Trustee”). Greene moved for reconsideration of this order on the grounds that it was entered without proper notice to creditors or an opportunity for creditors to be heard on the matter. The bankruptcy court held a hearing on Greene's Motion for Reconsideration on November 8, 2017, and the bankruptcy court ultimately denied Greene's motion and confirmed the appointment of Special Counsel. Greene has appealed that ruling and order to this Court. The Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. For the reasons set forth below, the ruling and order of the bankruptcy court is AFFIRMED.

         I. BACKGROUND

         The Trustee for the Estate was authorized by the bankruptcy court to retain the law firm of Breazeale, Sachse & Wilson, L.L.P (“BS&W”) as Special Counsel to represent the Estate and pursue claims the Debtor may have against members and former members of the Debtor under a contingency fee contract.[1] Greene opposes this appointment arguing that it violates the statutory protections for Debtors against conflicts of interest set forth in 11 U.S.C. § 327(c) and § 101(14). Greene claims that the proposed Special Counsel,

who is supposed to be capable of aggressively investigating claims on the LLC Debtor's behalf and asserting improper distribution claims against members of the Debtor LLC, certainly can not be done by a law firm which previously represented three of the nine members of the LLC, including representing them in this very bankruptcy proceeding.[2]

         It is undisputed that, prior to the filing of this bankruptcy action, BS&W represented the interests of three current members of Debtor InforMD, LLC, specifically Ruth Bass, Jason Marien, and Meredith Warner, M.D.[3] These three members were represented by BS&W in Greene's previous case against InforMD, LLC in the 19th Judicial District Court, Parish of East Baton Rouge, State of Louisiana.[4] Greene contends that “[t]here is virtually no chance that if this law firm, entrenched with, and biased in favor of three of the nine LLC members of the Debtor by years of prior representation, will do anything in the best interest of the Estate to collect from these three members.”[5] Greene claims that Ruth Bass was the financial controller of the InforMD, LLC's finances; thus, scrutiny of her actions and the financial records of InforMD, LLC will be critical. As such, Greene maintains that this is an impossible task for the same law firm previously hired to protect Ruth Bass from liability.

         The Trustee contends that, under 11 U.S.C. § 327(a), BS&W does not hold or represent an interest adverse to the Estate because the three former clients at issue have executed consents to BS&W's representation of the Estate with full knowledge that BS&W's representation of the Estate “could potentially become adverse” to the members, and they could be sued by the Estate. Also, the Trustee argues that Section 327(a) uses language in the present tense which would only require disqualification if counsel presently holds or represents an interest adverse to the Estate. Because there is no currently present representation of an adverse interest, there is no ground for disqualification under Section 327(a). Further, the Trustee contends BS&W qualifies as a “disinterested person” under the law because the attorneys appointed hold no personal interests materially adverse to the interest of the Estate. Finally, the Trustee maintains that he is the independent investigator on behalf of the Estate, and Special Counsel will take direction from him. Should BS&W fail to follow the Trustee's directions and pursue any member or former member of InforMD, LLC who owes the Estate, the Trustee “will fire them.”[6]


         A. Standard of Review

         District courts of the United States have jurisdiction to hear appeals from orders of the bankruptcy court.[7] “[Conclusions of law are reviewed de novo, findings of fact are reviewed for clear error, and mixed questions of fact and law are reviewed de novo.”[8]

         B. Conflict of Interest

         The Bankruptcy Code requires that a professional retained by the debtor in possession not “hold or represent an interest adverse to the estate, ” and that the professional be “disinterested.”[9] The term “disinterested” is defined in 11 U.S.C. § 101(14) as a person (1) who “is not a creditor, an equity security holder, or an insider, ” (2) who “is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor, ” and (3) who “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 for any other reason.”[10] “A party has an ‘adverse interest' to the estate if they: ‘(1) [ ] possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) [ ] possess a predisposition under circumstances that render such a bias against the estate.'”[11] The determination of an adverse interest must be made “with an eye to the specific facts of each case.”[12] The standards for finding a conflict are “‘strict, '” and “attorneys engaged in the conduct of a bankruptcy case ‘should be free of the slightest personal interest which might be reflected in their decisions concerning matters of the debtor's estate or which might impair the high degree of impartiality and detached judgment expected of them during the course of administration.'”[13]

         Based on the testimony and comments by the bankruptcy court at the hearing, [14] 11 U.S.C. § 327(e) is also relevant to this discussion:

The trustee, with the court's approval, may employ, for a specified special purpose, other than to represent the trustee in conducting the case, an attorney that has represented the debtor, if in the best interest of the estate, and if such attorney does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.

         Counsel repeatedly referred to BS&W as “special counsel” that is employed for a “limited purpose.”[15]

         At the hearing on Greene's Motion for Reconsideration, the bankruptcy court considered the arguments presented by Greene, also made in this appeal, and denied Greene's motion for the following reasons:

In light of the waiver by the clients, former clients of Breazeale. Ms. Comeaux is in here. She's heard what I've had to say about the risk of showing partiality and being other than, as the statute requires, someone who has no or adverse interest to the debtor or to the estate with respect to the matter on which the attorney is to be employed.
This is on a case on a contingent fee basis. It's commercial litigation. It's not a fender-bender. It's not a rear-end accident, a whiplash case. I foresee difficulty getting somebody in who knows the terrain in a complicated matter.
This - I also see an advantage to trying to have me reconsider the other authorizing employment because for the very reason that it takes an experienced lawyer out of the equation.
So as I said, that doesn't mean that Breazeale gets a free pass if it turns out that anything in this case suggests that Breazeale is other than unbiased, then your ...

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