Opinion
ORDER ON MOTION TO EMPLOY MINTZ LEVIN COHN FERRIS GLOVSKY AND POPEO, P.C.
PETER W. BOWIE, Chief Bankruptcy Judge
Debtor Briarwood Capital, LLC has applied to employ Mintz Levin Cohn Ferris Glovsky and Popeo, P.C. (sometimes hereafter Mintz Levin or the Firm) as counsel for Briarwood as debtor-in-possession. Contemporaneously, Nicolas Marsch III, who is the managing member and sole interest holder of Briarwood, filed his own Chapter 11 proceeding, and has filed his own application to employ Mintz Levin as his counsel. And, Colony Properties, International LLC also seeks to employ the Firm. The United States Trustee has objected, arguing that because there are multiple debts, guarantees, and potentially preferential payments between Marsch, Briarwood and Colony, the Firm cannot represent one without having at least a potential conflict with the others. Creditor Lennar objects on the ground that attorney Davis of Mintz Levin, lead counsel for Briarwood, Marsch and Colony, is ineligible to be employed because he previously represented creditor HCC Investors, LLC and Lennar in earlier proceedings involving the same property and project.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).
The controlling statute is 11 U.S.C. § 327(a). It provides:
(a) Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys... 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. Mintz Levin has responded, arguing that the interrelated debts and litigation claims of Briarwood, Marsch and Colony make co-representation sensible, economic, and more affordable. The assets of both are mostly litigation claims, and success of either estate is dependent on success in pursuing the litigation while warding off the litigation claims against the estate.
The United States Trustee points out that according to the Schedules and Statements of Financial Affairs of the debtors, including also Colony Properties International, show that Marsch has a 100% membership interest in Briarwood, which he valued at over $274 million. Marsch also has a 100% membership interest in Colony Properties, Int'l. Marsch asserts he is also a creditor of Briarwood and is owed over $2 million. Marsch is a guarantor of debt owed by Briarwood to KBR Opportunity Fund II, and also of debt owed by Colony to the same entity. At the same time, Colony is a creditor of Marsch and is owed over $668,000. Within 90 days of filing, Marsch made payments to Colony of over $13,000, and within one year before made payments over $197,000 to Colony. Colony is a creditor of Briarwood, owed over $50,000, while Briarwood made payments of over $6,800 within the year before filing. Finally, Briarwood made payments to Marsch in the year preceding of over $21,000.
In the interim, the Court has ordered a trustee be appointed for Colony Properties, and the trustee has employed his own counsel after Court approval. Accordingly, the ruling on this employment application as to Colony is relevant historically, up to appointment of the trustee, insofar as the Firm seeks to be employed by the estate.
Mintz Levin's position, as advanced by itself and by the respective debtors is that any conflicts at the present are only potential conflicts, and only become actual if there is not enough assets to repay all creditors of all the estates in full. The Court disagrees, and points out that many decisions the respective debtors-in-possession have to make include whether to settle, whether to pursue specific litigation, how to ensure the primary obligor satisfies the debt and spares a guarantor, or vice versa. The Court is persuaded that many of those issues are current actual conflicts, with Mr. Marsch directing all the estates.
Even if the conflicts were only potential conflicts, the Court notes, as did the United States Trustee, that California Rule of Professional Conduct 3-310(C)(1) and (2) provides:
(C) A member shall not, without the informed written consent of each client:
(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or
(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict;....
Even if the Firm obtained written conflict waivers from Mr. Marsch for his own estate, and from Mr. Marsch as 100% member of Briarwood and Colony Properties, the Court is persuaded such waivers would be ineffective where not granted by creditors or creditors' committees, to whom the debtors-in-possession owe duties. As noted recently in In re Straughn , 428 B.R. 618, 627 (Bankr. W.D. Pa. 2010): "Consent by a Chapter 11 debtor to waive conflicts is insufficient to cure any actual or potential conflicts because the ultimate parties in interest are the bankruptcy estate's creditors." The Straughn court also observed:
As a practical matter, given the nature of the relationship between a sole shareholder and the related corporation, it is difficult to imagine a situation where both parties in separate Chapter 11 cases could be represented by a single attorney.
428 B.R. at 627-28. Other courts agree. In re Hoffman , 53 B.R. 564, 566 (Bankr. W.D. Ark. 1985); In re Interwest Business Equipment. 23 F.3d 311 , 316-17 (10th Cir. 1994). In Interwest, the Tenth Circuit borrowed from an earlier Bankruptcy Court decision in stating:
The reasons why counsel to a debtor in possession must meet the high standards of undivided loyalty established in § 327(a) are explained in In re McKinney Ranch Assoc. , 62 B.R. 249 (Bankr. CD. 1986).
It is the duty of counsel for the debtor in possession to survey the landscape in search of property of the estate, defenses to claims, preferential transfers, fraudulent conveyances and other causes of action that may yield a recovery to the estate. The jaundiced eye and scowling mien that counsel for the debtor is required to cast upon everyone in sight will likely not fall upon the party with whom he has a potential conflict.
The Tenth Circuit continued to borrow from McKinney and quoted:
The policy behind disqualification for representing potentially conflicting interests provides the key to its extent. The jaundiced eye and scowling mien of counsel for the debtor should fall upon all who have done business with the debtor recently enough to be potential targets for the recovery of assets of the estate. The representation of any such party disqualifies counsel from representing a debtor.
23 F.3d at 316. As the United States Trustee has pointed out, from the Schedules and Statements of Financial Affairs of the respective debtors we know of inter-debtor debts and receivables, as well as potentially preferential payments between them. As good a firm as Mintz Levin is, and as skilled as Mr. Davis and his colleagues are, they cannot take on representation of multiple debtors-in-possession with the competing and conflicting interests of Mr. Marsch, Briarwood and Colony Properties and still meet the requirements of 11 U.S.C. 327(a).
Given the Court's ruling, and the nature of the conflicts between the Marsch, Briarwood, and Colony Properties estates, it may well be that the Firm is not eligible under § 327(a) at this point to represent any of the three debtors. That issue has not been squarely addressed, however. Accordingly, having hereby denied the applications of the Firm and debtors to be employed by the Marsch, Briarwood and Colony Properties estates, it is for the debtors-in-possession in the first instance to determine who it wishes to now represent each, and to submit the appropriate applications. The Court has not forgotten the separate grounds in opposition asserted by Lennar. If Mintz Levin applies again to represent one of these debtors-in-possession, Lennar's objection may need to be addressed at that time. Because employment of the Firm has been denied at the present time, the Court need not address Lennar's objection now.
Conclusion
For the foregoing reasons, the Court finds and concludes that Mintz Levin is ineligible to represent the estates of Mr. Marsch, Briarwood and Colony Properties, or any two of them. Accordingly, the applications to employ Mintz Levin by and on behalf of each of those estates is denied.
IT IS SO ORDERED.