AUDREY R. EVANS, Bankruptcy Judge.
Now before the Court is the Application to Employ Attorney (the
The Debtor, Living Hope Southeast, LLC (
In 2008, LHSW's case converted to Chapter 7, and Renee Williams was appointed Trustee (the
The Settlement Agreement, signed May 27, 2009, documented the settlement reached between the LHSW Trustee and the defendants in five adversary proceedings brought by the Trustee, including a lawsuit against each of the Stephenses (4:09-ap-7019 and 4:09-ap-7025) and a lawsuit against LHSE (4:09-ap-7023). The agreement provided for a consent judgment to be entered against Alice and Kimbro Stephens in the amount of $1,150,000, on conditions, with at least $750,000 to be paid by December 31, 2011. To secure payment of the consent judgment, LHSE agreed to allow the LHSW Trustee an inchoate judgment lien on all the memberships interests of LHSE (which are indirectly owned by the Stephenses) and on all income derived from the operations of LHSE. The Settlement Agreement further provided that upon the Stephens's default, the inchoate judgment lien would "immediately and automatically ripen into a fully vested and perfected lien on all LHSE membership rights, and on all of its assets and income to the extent such is required to satisfy the balance due on the Consent Judgment."
On behalf of LHSE, Smith established an account at Metropolitan National Bank named the "LHSE, LLC, Escrow Account." Smith testified that he and the LHSW Trustee had a verbal agreement to hold the funds in the account with Smith acting as escrow agent in order to hold the settlement payments until a final order was entered approving the settlement. He testified that the account was opened on March 16, 2009, when there was a settlement agreement in place with the LHSW Trustee; the settlement agreement was then executed on May 27, 2009, and subsequently approved by the Bankruptcy Court. (Regardless of whether this account was a formal escrow account, the Court finds it served the purpose of holding funds in escrow as that term is commonly understood.) LHSE has paid a total of $250,000 to the account towards the settlement, with the most recent payment of $50,000 paid in December 2011; $53,500 paid between October 2009 and February 2010; and $146,500 paid as of October 2009. (Pinewood Exhibit #11). Payments were made from the escrow account to the LHSW Trustee as follows: $50,000
Judge Mixon's approval of the settlement was appealed to the District Court for the Western District of Arkansas, and the Honorable Jimm Larry Hendren reversed Judge's Mixon's Order Approving Settlement finding that the settlement encompassed alter ego/veil piercing claims personal to LHSW's creditors which the Trustee did not have standing to bring. See Copy of Order, In re Living Hope Southwest, No. 4:06-bk-71484 (March 18, 2011) (docket #584). On remand, Judge Mixon held additional hearings and approved the settlement again but carved out the alter ego/veil piercing claims. See Supplemental Order Approving Settlement, In re Living Hope Southwest, No. 4:06-bk-71484 (May 27, 2011) (docket #609) and Amended Supplemental Order Approving Settlement, In re Living Hope Southwest, No. 4:06-bk-71484 (August 24, 2011) (docket #632). Judge Mixon also entered an injunction in June 2011 prohibiting Pinewood from pursuing LHSE and another individual in the Miller County Case finding that it was pursuing the LHSW Trustee's settled causes of action, and that while Pinewood could pursue its alter ego/veil piercing theories against LHSE and other individuals in State Court, it could not pursue those causes of actions the LHSW Trustee had previously settled.
While the LHSW Settlement proceeded through the appeals process, Miller County Circuit Judge Kirk Johnson entered several preliminary injunction/restraining orders which enjoined the defendants (including the Debtor, the Stephenses and various related trusts and partnerships) from transferring "any assets, except in the ordinary course of the individuals' and entities' business pending trial." (Pinewood Exhibits 2-4: Orders entered by Judge Johnson on May 7, 2010, May 20, 2010 and June 4, 2010).
In sum, while LHSE continues its business under protection of the Bankruptcy Code, the validity of the settlement reached between the LHSW Trustee, LHSE and other defendants is pending before Judge Holmes in the Western District, and a motion to remand Pinewood's Miller County Case against LHSE and other defendants is pending before Judge Hickey. The Court also notes that David Kimbro Stephens filed bankruptcy under Chapter 7 on November 30, 2010, the Honorable Richard D. Taylor presiding (No. 6:10-bk-76216), and that case remains open.
In the course of at least six years of litigation, the dispute between Pinewood and the various entities owned by the Stephenses have come before three bankruptcy judges, at least one state court judge, and at least three district court judges. The extent of this litigation has created enormous complexity. In reliance on this complexity, Pinewood uses a routine application to hire counsel as yet another opportunity to pierce the corporate veil of LHSE, which is the cause of action currently pending before Judge Hickey and awaiting a decision on remand. To what extent Pinewood gets to pursue its veil piercing action is also the subject of the appeals before Judge Holmes. Regardless of whether the veil of LHSE should be pierced for the benefit of Pinewood (or whether whatever wrongs the Stephenses committed in creating LHSE were righted by the settlement with the LHSW Trustee), the Debtor and its owners — the Stephens — share a common interest at the heart of this bankruptcy: continuing to operate a business providing medical services despite protracted litigation with Pinewood. The only way for LHSE to keep operating is to keep its provider number, and according to Smith, paying the LHSW Trustee on the settlement allowed LHSE to do so. While Pinewood argues these prepetition payments and
As the Court explained in its August 6, 2012 Order, the Court may approve a debtor-in-possession's employment of counsel to represent it in carrying out its duties under the Bankruptcy Code pursuant to § 327(a). "Under § 327(a), there are essentially two conditions for an attorney's employment: the attorney must be `disinterested,' and the attorney cannot hold or represent an interest adverse to the estate." In re M & M Marketing, L.L.C., 426 B.R. 796, 802 (8th Cir. BAP 2010). The Court previously found that none of the applicants, as individuals, held an adverse interest to the Debtor, and that none of the applicants had an identifiable conflict by representing any other creditors, insiders or parties-in-interest. The issue raised by Pinewood is whether the applicants, and specifically Jim Smith, who has represented the Debtor for approximately four years prepetition, actually represent insiders who may have an adverse interest to the Debtor. These insiders are allegedly the AK Trust (which owns 99% of the Debtor's membership interests) and Alice and Kimbro Stephens who are beneficiaries of the AK Trust and who are liable to Renee Williams, Chapter 7 Trustee, for the LHSW Settlement.
The Court previously found that Smith did not personally have any conflicts with the Debtor. In re Living Hope Southeast, LLC, No. 4:12-bk-11082, at 4, 2012 WL 8670117 (August 6, 2012) ("In this case, there is no allegation that any of the applicants, as individuals, hold an adverse interest to the Debtor. Further, none of the applicants have an identifiable conflict; they do not represent any other creditors, insiders or parties-in-interest."). "[A]n attorney is not disinterested because he represents an entity that is not disinterested. Whether an attorney (or law firm)
However, the second requirement of § 327(a) is that the attorney not hold or represent an interest adverse to the estate; this requirement imputes a client's conflict with an estate to the attorney.
In re M & M Marketing, L.L.C., 426 B.R. at 802-803 (emphasis added in bold). Accordingly, the Court must determine whether Smith actually represents insiders such as the AK Trust, Kimbro Stephens or Alice Stephens (who may but do not necessarily hold adverse interests to the Debtor).
Smith testified that he began representing LHSE after Renee Williams, the LHSW Trustee, filed a complaint against LHSE in the Living Hope Southwest bankruptcy, approximately four years ago in 2008. (Transcript, p. 40, lines: 16-21). Smith testified that he also represents LHSE in connection with the Miller County Case. (Transcript, p. 46, lines: 15-17). Specifically, Smith stated:
(Transcript, p. 32: lines 15-22).
Smith testified he was hired by Mike Grundy, LHSE's manager and his initial contact, but said that he has sometimes met with Kimbro Stephens, and assumed that his representation of LHSE was approved by Kimbro Stephens and Alice Stephens, as beneficiaries of the AK Trust, as well as Robert Williams, as the Trustee of the AK Trust. (Transcript, p. 58, lines: 7-25). On direct examination by Debtor's other attorney, Chip Welch, Smith testified that he went to great lengths to make sure that all parties, including the Stephenses, knew who Smith and Welch represented. He said:
(Transcript, p. 38, lines: 3-16).
Based on this uncontroverted testimony, and having previously rejected Pinewood's
Pinewood also argues that Smith should be disqualified because he represented LHSE prior to its bankruptcy filing while it made regular distributions to its members and made payments on the LHSW Settlement, and that he in fact directed LHSE to make these transfers. It is this personal involvement in LHSE's prepetition conduct that Pinewood argues creates a conflict for Smith. Smith's representation of LHSE prior to its bankruptcy alone would clearly not disqualify him as counsel. Section 1107(b) states, "Notwithstanding section 327(a) of this title, a person is not disqualified for employment under section 327 of this title by a debtor-in-possession solely because of such person's employment by or representation of the debtor before the commencement of the case."
With respect to member distributions, Smith explained that distributions to the AK Trust were regularly made for the benefit of Richard Cox, the Trustee in Kimbro Stephens's bankruptcy and that such distributions ceased once the petition was filed. These distributions were disclosed on the Debtor's Statement of Financial Affairs which listed monthly payments of $8,500 to the AK Trust for the past year. Grundy testified that he made the distributions to the AK Trust upon request and on the advice of LHSE counsel, Smith. The Court has insufficient information regarding the Kimbro Stephens bankruptcy
Pinewood's counsel also raised questions about LHSE's payments of other Miller County defendants' attorney fees. Grundy confirmed that such payments were made, and Smith explained that based on having appeared before Judge Johnson, he understood some payments were excepted from the injunction as payments made in the ordinary course of Debtor's business, and that exception included making payments for attorneys fees under an indemnification agreement LHSE had with other defendants in the Miller County Case. He stated that at that the initial restraining order hearing in Miller County, he explained the need for such an exception:
(Transcript, p. 145). No information was provided to the Court regarding which defendants' attorneys fees were paid or how much. Accordingly, the Court has insufficient information concerning this allegation to make any finding; this allegation alone is not enough to show a conflict between Smith and the Debtor.
Smith also explained that he believed the Debtor had to make payments on the LHSW Settlement to keep the business afloat and to keep its Medicaid/Medicare provider number. He testified that in the course of the litigation by the LHSW Trustee against LHSE (among other defendants), he determined that it would be in the best interests of LHSE to settle the Trustee's claims against LHSE related to the transfers from LHSW to LHSE that occurred after LHSW's bankruptcy filing. Smith further explained that he opened the escrow account to put settlement payments there until a final order was entered approving the settlement.
Smith also explained that the ongoing lawsuit in Miller County was an attempt to lock up LHSE assets and keep it from conducting business, and that during this time, LHSE continued to make payments to the LHSW Trustee to keep the Trustee from executing the inchoate judgment lien against LHSE as she had threatened. Smith stated that if the LHSW Trustee declared a default, LHSE would lose its provider number, and that new numbers are not currently being assigned.
(Transcript, p. 142).
Grundy testified that he always had reservations about making the settlement payments while the settlement was being appealed; he had hoped that LHSE might not owe the payments after all, but trusted Smith to make the right decision. Smith testified that Grundy, as manager of LHSE, ultimately made the decision to authorize the settlement payments. Smith also acknowledged Grundy's hesitation to make the payments:
(Transcript, p. 92).
Smith explained that LHSE filed this bankruptcy because of an order entered in Miller County that would have "killed off" LHSE. He explained that it was a matter of survival for the company who employed a large number of persons. He believed through bankruptcy, LHSE could honor its Settlement Agreement with the LHSW Trustee (which had not been stayed pending its appeal) and have Pinewood's claim, if it has one against LHSE, adjudicated. Smith's explanation regarding the settlement payments is completely plausible, and the Court finds Smith had valid reasons to counsel LHSE to make such payments, and there is no actual conflict between Smith and Debtor based on these payments.
Having reviewed the record in this case and the applicable law, the Court finds that Smith does not actually represent insiders of the Debtor, and that his prepetition representation of the Debtor while certain transfers took place does not create an actual conflict of interest between Smith and the Debtor. Accordingly, the Court finds Smith is both disinterested and does not hold or represent an adverse interest to the Debtor's estate. Further, the Court finds that Smith's representation of the Debtor is in the best interests of the Debtor's estate in that Smith is best equipped to represent the Debtor due to his knowledge of the Debtor, its operations, and the litigation that both preceded and succeeded this bankruptcy case. Additionally, based on the testimony of Grundy and Smith, the Court finds that the Debtor is unlikely to find local counsel willing to represent the Debtor, and that obtaining new effective counsel, particularly at out-of-state rates, will be cost-prohibitive to this estate.
For these reasons, it is hereby
Although the Court does not have enough information to determine whether any of these transfers might be avoidable (or what defenses might apply), the Court notes that this Debtor may have plausible reasons for not pursuing avoidance actions with respect to these transfers. The Debtor has had mostly positive income flow based on its operating reports filed during its bankruptcy, and appears to be a profitable business. Further, there is no evidence the Debtor was insolvent at the time these transfers were made, particularly considering its position that Pinewood does not have a claim against it since it was not a party to the lease between Pinewood and LHSW. (Only two claims have been filed in LHSE's bankruptcy: one by the LHSW Trustee and one by another creditor who claims to be owed approximately $27,000.) Once again, until the Miller County Case is resolved, it cannot be determined whether or not LHSE owes Pinewood at all.
Likewise, there was some unclear testimony about whether the Debtor had hired a Medicaid reimbursement firm during bankruptcy without court approval; this omission may also be cured by the Debtor and does not warrant disqualification of Smith and his firm.
