In Re Kujawa

112 B.R. 968, 1990 Bankr. LEXIS 686, 20 Bankr. Ct. Dec. (CRR) 607, 1990 WL 42575

• Court: United States Bankruptcy Court, E.D. Missouri
• Decided: April 4, 1990
• Docket: 12-43889
• Status: Published

Opinion

MEMORANDUM OPINION

DAVID P. MCDONALD, Chief Judge.

I. JURISDICTION

This Court has jurisdiction over the parties and subject matter of this proceeding pursuant to 28 U.S.C. §§ 1334,151, and 157 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. This is a “core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(A), which the Court may hear and determine.

II. PROCEDURAL BACKGROUND

This involuntary Chapter 7 case was filed on December 4, 1989. On February 21, 1990, Tridon Corporation (“Tridon”) and Billboard Cafe at Lucas Plaza, Inc. (“Billboard”) filed their Motion To Intervene And To Join In The Involuntary Petition. On March 2, 1990, alleged Debtor James Kujawa d/b/a Restaurant Builders filed its Motion To Dismiss Intervening Creditors’ Petition To Intervene And To Disqualify Counsel. In addition, the alleged Debtor filed a Memorandum in support of its Motion.

A hearing was held on March 5, 1990, at which time the Court heard arguments on the Motion To Disqualify Counsel. A supplemental hearing was held on March 7, 1990. The intervening creditors filed their Memorandum in Opposition on March 12, 1990 and the alleged Debtor filed its Reply on March 14, 1990. A telephone conference was conducted by the Court on March 27, 1990. At that time, attorneys for the alleged Debtor and the intervening creditors agreed to submit Motions E and G to the Court on the pleadings, record and briefs.

III.FACTUAL BACKGROUND

James Kujawa, alleged Debtor herein, is a building contractor doing business as Restaurant Builders. In January, 1989, Kujawa and Paul A. Ebeling, together with their jointly owned entity, Billboard Cafe at Lucas Plaza, Inc., entered into an agreement to build, co-own and operate the Billboard Cafe. In addition, Kujawa was contracted to build offices for Tridon Corporation. He and Ebeling held shares in Tridon, a corporation formed in December, 1988, with the assistance of general counsel and fellow shareholder, Richard E. Schwartz, Esq. Mr. Schwartz also incorporated Billboard in December, 1988, and continues to serve as general counsel to both companies. The companies now move to intervene and join in the involuntary petition.

From January until May, 1989, Mr. Kuja-wa received payments from Cooperative Management Company, the owner of the building where both Tridon and Billboard are located, as he completed certain phases of the construction work. In return, Kuja-wa supplied lien waivers to both Tridon and Billboard. By mid-May 1989, however, a dispute arose concerning the construction of both the offices and the restaurant. Mr. Kujawa ceased working on the projects on approximately May 15, 1989. The dispute surrounding the two projects continued through the Fall of 1989 and culminated with the filing of this involuntary Chapter 7 proceeding. From the testimony presented, it is apparent that Paul Ebeling solicited Mr. Kujawa’s trade creditors and encouraged them to file the involuntary petition which, through his two companies, he now seeks to join. For his part, Mr. Kuja-wa filed a mechanic’s lien against Tridon and Billboard on January 9, 1990.

Mr. Kujawa employed Richard Schwartz & Associates Ltd. as his attorneys from early 1988 until approximately September 1, 1989. Richard E. Schwartz personally represented Mr. Kujawa in at least five lawsuits in that period and advised him on various other matters. In August of 1989, Mr. Kujawa considered filing a bankruptcy petition; however, by letter dated August 24, 1989, his attorney of record, Richard E. Schwartz, recommended against such a filing. Throughout, Mr. Schwartz had access to Kujawa’s business and personal financial information and currently retains copies of those files. During the course of their attorney-client relationship, Schwartz and Kujawa even shared offices and had adjoining desks. The scope of the relationship only can be described as pervasive.

On December 4, 1989, Sidney A. Gould, Esq., an attorney affiliated with Richard Schwartz & Associates, Ltd., filed this involuntary Chapter 7 case on behalf of Ku-jawa’s creditors. These creditors supplied labor and materials to the Tridon and Billboard construction projects. Mr. Gould withdrew from the case on January 12, 1990; the original petitioning creditors have retained other counsel. Richard Schwartz & Associates Ltd. filed its Entry of Appearance on behalf of the proposed intervening creditors, Tridon and Billboard, on February 21, 1990. The law firm also filed as an intervening creditor in these proceedings on March 7, 1990.

IV. DISCUSSION AND ANALYSIS

A. Creditors’ Motion To Join In The Involuntary Petition

The commencement of an involuntary Chapter 7 case against a debtor who has 12 or more creditors requires three or more entities as petitioning creditors, each of which holds a claim against the debtor that is not contingent as to liability or the subject of a bona fide dispute, provided that their claims aggregate at least $5,000 more than the value of any liens against the debtor’s property which the petitioning creditors may hold. 11 U.S.C. § 303(b)(1). The language contained in Section 303(b)(1) disqualifying an entity which holds a claim that is the subject of a bona fide dispute was added to the Bankruptcy Code by the Bankruptcy Amendments and Federal Judgeship Act of 1984, Pub.L. No. 98-353, 98 Stat. 333, 392 (1984). However, the authors of the amendment did not modify the language of 11 U.S.C. § 303(c), which describes the rights of creditors seeking to join in an involuntary petition after its initial filing. Section 303(c) reads as follows:

(c) After the filing of a petition under this section but before the case is dismissed or relief is ordered, a creditor holding an unsecured claim that is not contingent, other than a creditor filing under subsection (b) of this section, may join in the petition with the same effect as if such joining creditor were a petitioning creditor under subsection (b) of this section. 11 U.S.C. § 303(c).

Although the language of § 303(c) does not included the phrase “bona fide dispute”, it is implicit that an intervening creditor must satisfy the same requirements set out for petitioning creditors under § 303(b)(1). See, 2 Collier On Bankruptcy ¶ 303.33 at 303-111 (Matthew Bender, 15th ed 1989). As Judge Schwartzberg has noted,

the absence of a “bona fide dispute” should also be required of an intervening petitioning creditor in order to harmonize this provision [§ 303(c) ] with the requirements for petitioning creditors under 11 U.S.C. § 303(b)(1), because a joining creditor is accorded the same effect as an original petitioning creditor.... The omission of the [bona fide dispute language] should be regarded as a legislative oversight. In re Braten, 86 B.R. 340, 343 (Bankr.S.D.N.Y.1988).

The courts have formulated differing standards for determining whether a debt is the subject of a bona fide dispute. In In re Johnson Hawks, Ltd., 49 B.R. 823 (Bankr.D.Hawaii 1985), the court took a subjective approach and inquired into the parties’ respective intentions. The court defined a bona fide dispute as one in which an assertion of a claim or right made in good faith and without fraud or deceit on one side is met by contrary claims or allegations made in good faith and without fraud or deceit on the other side. Id., at 830. This standard proved to be cumbersome and has not been widely adopted.

A more objective standard was formulated by the court in In re Stroop, 51 B.R. 210 (Bankr.D.Colo.1985). There, the court approached the issue as it would a motion for summary judgment and found that if the defense of the alleged debtor raises material issues of fact or law so that summary judgment could not be rendered as a matter of law in favor of the creditor, the claim would be deemed subject to a bona fide dispute. Id., at 212. However, no widely accepted definitional standard emerged until Judge Rhodes issued his opinion in In re Lough, 57 B.R. 993 (Bankr.E.D.Mich.1986).

In Lough, the court conducted a comprehensive survey of the existing case law and analyzed the legislative history of the 1984 amendments to § 303. Explicitly rejecting the tests set out in Johnston Hawks and Stroop, supra, the court found that it was clear that Congress intended to disqualify a creditor whenever there is any legitimate basis for the debtor not paying the debt. 1 57 B.R. at 997. Accordingly, the court held that if there is either a genuine issue of material fact that bears upon the debtor’s liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed. Id. The Lough standard has been adopted by virtually every court that has considered a bona fide dispute question. See, e.g., Matter of Busick, 831 F.2d 745, 749 (7th Cir. 1987); Bartmann v. Maverick Tube Corp., 853 F.2d 1540, 1544 (10th Cir.1988); B.D.W. Assoc. v. Busy Beaver Bldg. Ctrs., 865 F.2d 65, 66 (3rd Cir.1989).

In Busick, supra, the Seventh Circuit expressly adopted the Lough standard and held that Section 303 does not require the court to determine the outcome of any dispute, only its presence or absence. 831 F.2d at 750. Therefore, “only a limited analysis of the claims at issue is necessary.” Id., citing, In re Busick 65 B.R. 630, 637 (N.D.Ind.1986). Accordingly, this Court will conduct a limited inquiry into the intervening creditors’ claims and determine whether there is a bona fide dispute as to either the law or the facts underlying their claims.

The Court finds that there are numerous factual disputes surrounding the intervening creditors’ claims. With respect to the construction contracts, the contract amounts are unclear, the scope of work is subject to question, and the parties to the purported contracts are not clearly identified. Similarly, nagging legal questions remain unresolved. The inflammatory allegations surrounding the “embezzlement” charge are legitimately subject to dispute as are the charges related to the claims for monies had and received. Accordingly, the Court finds that all of the claims asserted by the intervening creditors are currently the subject of bona fide dispute and, as such, holds that the creditors do not qualify as intervening creditors under 11 U.S.C. § 303(c). Therefore, the Motion To Join In The Involuntary Petition filed by Tridon Corporation and Billboard Cafe at Lucas Plaza, Inc. is DENIED.

B. Creditors’ Motion To Intervene Un- . der Rule 2018

The intervening creditors argue in the alternative that they should be permitted to join this involuntary petition pursuant to Bankruptcy Rule 2018. They assert that they are “interested parties” to the present action and should be allowed to intervene. Rule 2018 reads, in pertinent part, as follows:

(a) Permissive Intervention. In a case under the Code, after hearing on such notice as the court directs and for cause shown, the court may permit any interested entity to intervene generally or with respect to any specified matter, (emphasis added).

The Rule provides interested entities with an opportunity to be heard in a bankruptcy case. Still, the language of the Rule clearly indicates that the decision to grant an entity leave to intervene remains entirely within the court’s discretion.

The Court finds that the intervening creditors have not demonstrated that they are interested parties entitled to intervention under Rule 2018. The creditors are seriously mistaken when they assert that they are entitled to intervention in an involuntary petition as a matter of right. Intervening Creditors’ Memorandum at p. 15. The case law clearly establishes that intervention under Rule 2018(a) will be permitted at the discretion of the court. See, e.g., In re Ionosphere Clubs, Inc. 101 B.R. 844, 853 (Bankr.S.D.N.Y.1989). Therefore, the Court finds that permissive intervention for these creditors is not appropriate and holds that creditors’ Motion To Intervene shall be, and is hereby, DENIED.

C. Alleged Debtor’s Motion To Disqualify Counsel

Alleged Debtor, James Kujawa, requests that this Court disqualify Richard Schwartz & Associates from this involuntary Chapter 7 proceeding. Furthermore, Kujawa seeks recovery of costs and attorneys fees expended in conjunction with its motion. The extreme nature of the remedy requires the Court to carefully examine the specific circumstances presented in the case. Thereafter, the Court will apply the standards of professional conduct prescribed by the United States District Court for the Eastern Judicial District of Missouri. 2 More precisely, the Court will approach the issue with reference to Rules 1.6 and 1.9 of the Rules of Professional Conduct which govern an attorney’s ethical obligations to former clients. Mo.Sup.Ct. Rule 4, Rules 1.6 and 1.9 (V.A.M.R.1989). Rule 1.9(a) clearly states that:

A lawyer who has formerly represented a client in a matter shall not thereafter:

(a) represent another person in the same or substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation_ Id. Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such a lien is—

(1) a judicial lien ...

Richard Schwartz & Associates Ltd., as attorneys for the proposed intervening creditors, have acknowledged that they represented James Kujawa in at least four different lawsuits over the past two years. In addition, the evidence presented at the hearing on March 5, 1990, reveals that Mr. Schwartz had intimate knowledge of Mr. Kujawa’s personal and business dealings. Although Schwartz & Associates never represented Mr. Kujawa in a lawsuit against either of the proposed intervening creditors, they retain detailed information about Mr. Kujawa that is substantially related to the adverse claims asserted on behalf of Tridon and Billboard. Significantly, Mr. Schwartz counseled Mr. Kujawa on bankruptcy matters as recently as August 24, 1989. Mr. Kujawa has not consented to the representation of the proposed intervening creditors by Schwartz & Associates.

Courts have long held that confidential disclosures, actual or presumed, necessitate disqualification of an attorney when he represents an adverse interest in a substantially related matter. See, e.g., State of Arkansas v. Dean Foods Products Company, Inc., 605 F.2d 380, 384-85 (8th Cir. 1979); Fred Weber, Inc. v. Shell Oil Co., 566 F.2d 602 (8th Cir.1977), cert. den. 436 U.S. 905, 98 S.Ct. 2235, 56 L.Ed.2d 403 (1978). 3 See also, Matter of Davenport Communications Limited Partnership, 109 B.R. 362 (Bankr.S.D.Iowa 1990); Matter of Global Video Communications Corporation, 102 B.R. 868 (Bankr.M.D.Fla. 1989). Therefore, this Court must find that the law firm of Richard Schwartz & Associates is disqualified from this involuntary Chapter 7 proceeding. 4 Alleged Debt- or’s Motion To Disqualify Counsel, Schwartz & Associates, Ltd., shall be, and is hereby, GRANTED.

The Court takes notice of the fact that Richard E. Schwartz has been disqualified in connection with at least two other cases before the United States Bankruptcy Court For The Eastern District Of Missouri and, as a consequence, he should be fully apprised of the ethical standards governing the practice of law before this Court. See, In re Charles D. Schmitt, Case No. 88-00430-BKC-JJB (Bankr.E.D.Mo.1988); In re Charles Schmitt & Co., Case No. 88-00492-BKC-JJB (Bankr.E.D.Mo.1988). Accordingly, pursuant to the provisions of Bankruptcy Rules 1018 and 7054(b), alleged Debtor shall submit for Court approval a schedule of costs and attorney fees incurred in connection with, but solely limited to, its Motion To Disqualify Counsel.

An Order consistent with this Memorandum Opinion will be entered this date.

ORDER

For the reasons set forth in the Memorandum Opinion filed this date, it is

ORDERED that

(1) The Motion To Join In The Involuntary Petition filed February 21, 1990, on behalf of proposed intervening creditors, Tridon Corporation and Billboard Cafe at Lucas Plaza, Inc., shall be, and is hereby, DENIED;

(2) The Motion To Intervene filed February 21, 1990, by Tridon Corporation and Billboard Cafe at Lucas Plaza, Inc. shall be, and is hereby, DENIED;

(3) The Motion To Disqualify Counsel, Richard Schwartz & Associates, Ltd., filed by alleged Debtor, James Kujawa d/b/a Restaurant Builders, on March 2, 1990, shall be, and is hereby, GRANTED; and

(4) The alleged Debtor shall file with the Clerk of the Court and with a copy to Richard Schwartz & Associates, Ltd., within ten (10) days of the entry of this Order, a schedule of costs and attorneys fees incurred by it in connection with, but solely limited to, its Motion To Disqualify Counsel. Any objections ■ to the schedule of costs and fees shall be filed with the Court within five (5) days thereafter. In the event that no such objections are filed, the Court will approve the schedule of costs and attorney fees without hearing.

1 . The court noted that the rationale underlying the 1984 amendment was explained by its proponent as follows:

The problem can be explained simply. Some courts have interpreted section 303’s language on a debtor’s general failure to pay debts as allowing the filing of involuntary petitions and the granting of relief even when the debt- or's reason for not paying is a legitimate and good-faith dispute over his or her liability. This interpretation allows creditors to use the Bankruptcy Code as a club against debtors who have bona fide questions about their liability, but who would rather pay up than suffer the stigma of involuntary bankruptcy proceedings.

My amendment would correct this problem. Under my amendment, the original filing of

an involuntary petition could not be based on debts that are the subject of a good-faith dispute between the debtor and his or her creditors. In the same vein, the granting of relief could not be premised solely on the failure of a debtor to pay debts that were legitimately contested as to liability or amount.

I believe this amendment, although a simple one, is necessary to protect the rights of debtors and to prevent misuse of the bankruptcy system as a tool of coercion. I also believe it corrects a judicial misinterpretation of existing law and congressional intent as to the proper basis for granting involuntary relief. 30 Cong.Rec. S7618 (June 19, 1984) (comments of Senator Baucus). Lough, 57 B.R. at 996 (quoting In re Henry, 52 B.R. 8, 9-10 (Bankr.S.D.Ohio 1985)) (emphasis added).

2 . Local Rule 2(G)(2) states:

******

The Code of Professional Responsibility adopted by this Court is the Code of Professional Responsibility adopted by the Supreme Court of Missouri, as amended from time to time by that Court, except as otherwise provided by specific rule of this Court after consideration of comments by representatives of bar associations within the State of Missouri. (note, the Missouri Supreme Court repealed the Code of Professional Responsibility and adopted the Rules of Professional Conduct on August 7, 1985, effective January 1, 1986).

3 . The Court notes that Dean Foods and Fred Weber were overruled on other grounds by Firestone Tire and Rubber Co. v. Risjord, 612 F.2d 377, 378 (8th Cir. 1980). The precedential value of Dean Foods and Fred Weber remains unchanged in all other respects. See, Federal Deposit Ins. Corp. v. Amundson, 682 F.Supp. 981, 985 at n. 3 (D.Minn.1988).

4 . The Court is aware that Schwartz & Associates, Ltd. has filed an intervening claim on its own behalf. The firm will be permitted to participate in this involuntary proceeding only to the extent necessary to pursue its claim for attorneys fees.