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Keywords

settlementattorneymotionwillbankruptcychapter 11 bankruptcyobjectiongood faith

settlementlitigationattorneytrustwill

Related Cases

In re US Bentonite, Inc., 536 B.R. 948, 61 Bankr.Ct.Dec. 165

Facts

U.S. Bentonite, Inc. and its affiliates filed for Chapter 11 bankruptcy, with significant debts owed to collateral agents and a bank. The law firm Winship & Winship, P.C. was employed as counsel for the debtors. During settlement negotiations, attorney Bradley Hunsicker accepted a position with Markus Williams, a firm representing the collateral agents, but did not disclose this conflict for over three months. The UST objected to the settlement agreement proposed by the debtors, citing the non-disclosure of the conflict as a reason for disqualification and denial of compensation.

The only evidence submitted by the UST was the Statement of Undisputed Facts, and indeed, the relevant facts are undisputed. On March 14, 2013 (“Petition Date”), U.S. Bentonite, Inc. (“USB”) filed its voluntary petition for relief under Chapter 11. On March 19, 2014, Rock Springs Mineral Processing (“RSMP”) and Rock Springs Properties, Inc. (“RSP”) each filed for relief under Chapter 11. On April 28, 2014, the Court ordered the joint administration of the USB, RSMP and RSP cases.

Issue

Did the failure of the debtors' counsel to disclose a conflict of interest warrant disqualification and denial of compensation, and was the proposed settlement agreement in the best interests of the estate?

The central issue concerns the non-disclosure of an actual conflict that arose on March 11, 2015, the date Hunsicker received and accepted a position with Markus Williams.

Rule

Under 11 U.S.C. § 327(a) and Fed. R. Bankr. P. 2014(a), debtors-in-possession must employ professionals who do not hold or represent an interest adverse to the estate and have a continuing obligation to disclose any potential or actual conflicts of interest.

Under § 327(a), debtors-in-possession may hire professionals with court approval: Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, 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.

Analysis

The court determined that the failure to disclose the conflict of interest violated the bankruptcy rules, as the attorney's acceptance of a position with a firm representing a creditor created a connection that should have been disclosed. However, the court found that the settlement agreement was reached in good faith and involved multiple parties, thus it was not tainted by the non-disclosure. The court emphasized that the settlement was in the best interests of the creditors and the estate, given the administrative insolvency of the estates.

The Court agrees with the broad construction of Rule 2014(a), and the conclusion that Rule 2014(a) creates a continuing obligation for counsel to advise the Court when a potential or actual conflict of interest arises during the representation of a debtor-in-possession.

Conclusion

The court denied the UST's motion for disqualification and compensation denial for the law firm but prohibited the firm from seeking compensation for the period during which the conflict was not disclosed. The settlement agreement was approved as it was deemed fair and equitable.

The Court will not approve the $5,640.00 in fees and $412.10 in expenses incurred in these jointly administered cases between March 11, 2015, and April 30, 2015. Winship is not entitled to payment of those fees and expenses from any source.

Who won?

The Debtors prevailed in the case as the court approved their settlement agreement despite the UST's objections, finding it in the best interests of the estate.

The Debtors assert the settlement is fair and equitable and in the best interest of the estate because 'it avoids the cost, delay, and risk of further litigation. All creditors that have asserted interests in said funds are parties to the Agreement and are agreeing to resolve their disputes in a fashion that allows for the resolution of all Admin Clams.'

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