Opinion
Case No. 09-68239-wsd.
December 1, 2009
OPINION DENYING APPLICATION FOR APPOINTMENT AS COUNSEL TO THE CREDITORS' COMMITTEE
Honigman Miller Schwartz and Cohn LLP ("Applicant") has moved to be appointed as Counsel for the Creditors Committee. (Docket No. 60). The motion is opposed by the United States Trustee on grounds Applicant represents another "entity having an adverse interest in connection with the case" within the meaning of 11 USC § 1103, because Applicant also represents Riverfront Holdings, Inc. ("Riverfront"), the Debtor's landlord.
Debtor owns and operates a restaurant in downtown Detroit's largest office/hotel complex. Debtor's schedules show that (1) Riverfront is one of its 20 largest creditors, being listed on that form as owed $28,355; (2) Timothy Condor of Riverfront is one of three members of the Creditors' Committee, the other two members of which are Debtor's two largest food/food service purveyors; (3) Debtor is a lessee from Riverfront of the restaurant property under lease terms which Schedule G does not specify; (4) Riverfront is listed on Schedule F as a creditor owed $55,000 in rent and owed approximately $60,000 for valet parking; (5) Riverfront is listed on Schedule D as holding a "Lien on Liquor License." Riverfront is also shown on the Statement of Financial affairs as being a recipient of Debtor's financial statements prior to the bankruptcy filing. It appears from the Cash Collateral Order and a monthly financial filing that the basic ongoing monthly rent owed by Debtor to Riverfront is $26,666.66.
It was represented to the Court at the hearing that Debtor and Riverfront are in the process of negotiating some modification of their lease, presumably incident to Debtor filing its Plan and Disclosure Statement currently due to be filed on or before January 9, 2010. It was further represented that some modification is necessary for a feasible plan due to the economics of the case, and that a simple acceptance or rejection of the existing Riverfront lease, given the statutory imperatives incident to same, does not appear to be a viable alternative. The affidavit accompanying the application states that the Committee and Applicant have agreed "that, to the extent the Committee is adverse to Riverfront on any issue in the Chapter 11 case, the Committee will retain separate conflicts counsel. Riverfront has consented to this arrangement."
An adverse interest as used in § 1103 is not defined in the Bankruptcy Code. It is a term that also comes into play under § 327(a) of the Code as relates to an attorney for a debtor in possession or a trustee, in the context that such cannot hold or represent an interest adverse to the estate and otherwise be disinterested. One court, in considering when an interest might be "adverse" under § 327(a), after referring to cases that said that an interest is not considered "adverse" merely because "it is possible to conceive a set of circumstances under which they might clash", said:
The more difficult area is when a live conflict of interest has not quite emerged, yet the factual scenario is sufficiently susceptible to that possibility so as to make the conflict more than mere "hypothetical or theoretical." The courts have been far from uniform in the way they have formulated tests for dealing with this type of situation.
In re Leslie Fay Cos., 175 B.R. 525, 532 (Bankr. S.D.N.Y. 1994). That court then went on to conclude its discussion of the applicable legal standard:
Potential conflicts, no less than actual ones, can provide motives for attorneys to act in ways contrary to the best interests of their clients. Rather than worry about the potential/actual dichotomy it is more productive to ask whether a professional has "either a meaningful incentive to act contrary to the best interests of the estate and its sundry creditors — an incentive sufficient to place those parties at more than acceptable risk — or the reasonable perception of one." In other words, if it is plausible that the representation of another interest may cause the debtor's attorneys to act any differently than they would without that other representation, then they have a conflict and an interest adverse to the estate.
Id. at 533 (internal quotations omitted). This Court sees the same above principles enunciated in a § 327(a) context and inquiry as applying in the instant § 1103 situation where the two entities to be potentially served by Applicant are the Creditors Committee representing all of the unsecured creditors, on the one hand, and one of its creditors, Riverfront, on the other.
This Court previously, albeit in a § 327 inquiry but one which is equally applicable to the situation at hand, has allied itself with those courts which take a somewhat broad view of what an adverse interest is, concluding that a "potential adverse interest" is disqualifying. See In re Butterfield Ltd. Partnership, 131 B.R. 67 (Bankr. E.D. Mich. 1990) (Denying application of a firm to represent the debtor, a limited partnership, where the applicant also represented the principal of debtor and entities constituting the general and limited partners of the debtor who were also unsecured creditors).
The many ways in which the interests of Riverfront intersect the interests of, and its relationship to, the Debtor and its unsecured creditors leads to the conclusion that whether in one capacity or relationship or another, an adverse interest or conflict will likely arise. Riverfront's prepetition claims might be an issue, either in the context of what it receives under a plan, and/or what it must be paid incident to any assumption of its lease or some concurrent modification thereof. Of particular moment in this case is the noted centrality to the reorganization process of the lease between the Debtor and Riverfront — a lease which at this very moment is the subject of negotiation. The potential exists, and the situation requires, that the Committee take a very close, careful and independent look at the results of those negotiations and their impact on the interests it represents. While the legal effects of an assumption might be clear, the exercise of business judgment as to what is being assumed and whether it should be, are less clear in the context of a reorganization process or plan, all being properly the subject of oversight within appropriate legal standards by interested parties and the Court. Moreover, it would appear that were Applicant to be appointed, special counsel would need to be retained almost immediately regarding the lease. If anyone should bear such an obligation in these circumstances, it should be Riverfront, not the Committee. The status of Riverfront as an indicated secured creditor with respect to the Debtor's liquor license, including whether such a security interest is enforceable, and/or the value of such etc., presents an obvious potential for conflict between Riverfront and the unsecured creditors. It is not enough to say that it is or will be the Debtor who will and should raise some of those issues. The Debtor and the unsecured creditors could clearly be at cross-purposes on some of those questions, and just as importantly, the Committee representing those creditors, if properly and independently represented, might very well take a position that is inimical to that of Riverfront, given the various contexts in which such could arise.
In Butterfield, supra, this Court concluded that:
[T]he very least the Court can do . . . is to create a situation where debtor's counsel is able to take the actions required of it under the Rules of Professional Responsibility and the bankruptcy law, free of, and wholly unfettered by any concerns about its relationship to the general partner, or associated persons. It is those concerns which this Court feels constitute the potential adverse interest or the appearance of same which constitute the disqualifying factor.
131 B.R. at 70. Substitute the Committee for "debtor" and Riverfront for the general partner, or associated persons, and you have the Court's rationale for denial of the Application in this case.
The Court will enter an appropriate order.