In re Diva Jewelry Design, Inc.

367 B.R. 463, 57 Collier Bankr. Cas. 2d 1771, 2007 Bankr. LEXIS 1580, 48 Bankr. Ct. Dec. (CRR) 51, 2007 WL 1302600
CourtDistrict Court, S.D. New York
DecidedMay 1, 2007
DocketNo. 06-12256 (REG)
StatusPublished
Cited by6 cases

This text of 367 B.R. 463 (In re Diva Jewelry Design, Inc.) is published on Counsel Stack Legal Research, covering District Court, S.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Diva Jewelry Design, Inc., 367 B.R. 463, 57 Collier Bankr. Cas. 2d 1771, 2007 Bankr. LEXIS 1580, 48 Bankr. Ct. Dec. (CRR) 51, 2007 WL 1302600 (S.D.N.Y. 2007).

Opinion

DECISION ON APPLICATION TO RETAIN COUNSEL TO THE TRUSTEE

ROBERT E. GERBER, Bankruptcy Judge.

In this case under chapter 7 of the Bankruptcy Code, the newly elected chapter 7 trustee for the Estate, Matthew C. Harrison (the “Trustee”), has applied to employ attorney Leo Fox, Esq. under section 327(a) of the Code. The United States Trustee (“UST”) opposes the application. Insofar as the Court can determine, the UST does not contend that Mr. Fox is forbidden from representing the Trustee because Mr. Fox will in the future represent estate creditors with respect to the matters in this case. But she contends that Mr. Fox may not represent the Trustee because (1) earlier in this case Mr. Fox represented creditors who sought and obtained the election of the Trustee who would later hire Mr. Fox, (2) Mr. Fox would profit from the work he would thereafter do for the Estate, and (3) Mr. Fox might be required to prosecute preference claims, or defend consignment demands, brought against or by members of the client group he represented. As a result, the UST contends, Mr. Fox is not disinterested, represents interests adverse to the estate and has an actual conflict of interest.1 She also at least seemingly argues that retention of Mr. Fox should be disapproved on nonstatutory grounds.

[465]*465Allegations of adverse interest and inappropriate conduct are serious matters. The integrity, and appearance of integrity, of the bankruptcy system require conduct beyond reproach,2 and when allegations of adverse interest or inappropriate conduct are established, bankruptcy courts must take appropriate action. By the same token, allegations of such are serious matters for the targets of such allegations as well, and the targets of such allegations deserve the opportunity to defend themselves. Thus it was essential for both sides to make appropriate factual showings, in depth, and the Court held an evi-dentiary hearing.

Upon consideration of the evidentiary showing that each side made (and, in particular, that the UST did not make), the Court concludes that the application passes muster under section 327(a) and the applicable caselaw. Plainly a showing of a lack of disinterestedness, adverse interest, or improper conduct would make a proposed retention of a section 327(a) professional impermissible. But such has not been shown here.

The following are the Court’s findings of fact and conclusions of law in connection with its determination.

Facts

Diva Jewelry Design, Inc. (the “Debt- or”), a seller of jewelry and precious stones, filed a chapter 7 petition in September 2006. An interim trustee was appointed promptly thereafter. From early on in the case, creditor representatives expressed concerns that Debtor’s assets were unaccounted for, and that the Debtor might have engaged in misconduct. A group of creditors holding approximately $2 million out of the approximately $5.5 million in claims in this case retained a non-bankruptcy litigation attorney, Cindy Molloy, Esq., to press their interests in investigating an apparent disappearance of Estate’s assets and in achieving recovery on their claims. With her creditor group (and/or Ms. Molloy herself) dissatisfied with a perceived lack of aggressiveness on the part of the interim trustee in pursuing the creditor concerns, Ms. Molloy retained Mr. Fox, a bankruptcy attorney, as counsel to her firm, and Mr. Fox pursued, on the creditors’ behalf, Fed. R. Bankr.P. 2004 examinations in efforts, inter alia, to investigate how it was that there were so few assets in the Estate (when creditors had shipped the Debtor over $5 million in inventory),3 and to explore asset recovery opportunities. Mr. Fox also was retained to, and did, attend the 341 meeting and request a creditors’ trustee election for a permanent chapter 7 trustee; consult with Ms. Molloy’s firm regarding the election process; and file the papers in accordance with bankruptcy court procedures.4 While Mr. Fox was, strictly speaking, “of counsel” to Ms. Molloy, he from time to time referred to himself as the creditors’ counsel,5 and at the evidentiary hearing on this matter did not dispute that his representation of Ms. Molloy on an “of counsel” basis also constituted representation of the creditors.6 In any event, the Court so finds; though it was Ms. Molloy who hired Mr. [466]*466Fox and with whom Mr. Fox principally dealt, he must be found to have represented the creditors themselves.7

Mr. Fox introduced creditors (or at least members of the Molloy-Fox Creditor Group) to Matthew C. Harrison, Jr.,8 who was then elected as Trustee — unanimously. Mr. Fox moved to certify the Trustee’s election, and after a hearing on the matter, the Court appointed Mr. Harrison as Trustee, in accordance with the creditors’ vote. The Trustee now seeks to appoint Mr. Fox as counsel for the Trustee.

At the evidentiary hearing on this application, a trial attorney for the UST examined Mr. Fox as a witness on an adverse direct examination. Mr. Fox answered the UST’s questions without objection, and the Court finds his testimony to have been credible. No evidence was elicited that there was any promise, agreement or “quid quo pro” in connection with Mr. Fox’s introduction or recommendation of Mr. Harrison as a prospective permanent trustee, or with respect to Mr. Harrison’s later retention of Mr. Fox as the Trustee’s counsel. Nor did the UST seek to elicit evidence of such. However, it is reasonable to infer, and the Court finds, notwithstanding the UST’s failure to elicit more

facts, that Mr. Harrison and Mr. Fox had and still have a familiarity and working relationship,9 causing Mr. Fox to recommend the election of Mr. Harrison, and causing Mr. Harrison to wish to retain Mr. Fox — though, perhaps significantly for this dispute, there was no evidence of any agreement or understanding between them. And it is also reasonable to infer, and the Court does infer, that Mr. Fox believed that if Mr. Harrison were elected, there was a high probability that Mr. Harrison would seek to retain Mr. Fox as Trustee’s counsel.10 The Court listened with care to the UST questioning for facts that might establish some kind of unstated understanding or agreement beyond that, but none were forthcoming.

There was no evidence of any payment passing between Mr. Harrison or Mr. Fox, in either direction. It is reasonable to infer, and the Court does infer, that Mr. Harrison knew that if he were elected as chapter 7 trustee, he would be entitled to earn the trustee commissions that are authorized under law, and that Mr. Fox knew that if he were appointed as counsel, he would be entitled to earn payment for services he provided — in each case to the extent the Estate could afford them.11 [467]*467But there was no evidence of any consideration or arguable consideration running in favor of either of them other than to the extent to which “consideration” might be deemed to exist as a consequence of the opportunity to work for the Estate and thereby receive compensation authorized under law.

Mr. Fox will stop representing Ms. Mol-loy and her creditors after he is retained as the attorney for the Trustee.12

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Bluebook (online)
367 B.R. 463, 57 Collier Bankr. Cas. 2d 1771, 2007 Bankr. LEXIS 1580, 48 Bankr. Ct. Dec. (CRR) 51, 2007 WL 1302600, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-diva-jewelry-design-inc-nysd-2007.