In re Nu-South Industries, Inc.

Citations: 115 B.R. 90; 1990 Bankr. LEXIS 1087; 1990 WL 67954Docket: Bankruptcy No. 9007242SEG

Court: United States Bankruptcy Court, S.D. Mississippi; May 9, 1990; Us Bankruptcy; United States Bankruptcy Court

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The Court, led by Bankruptcy Judge Edward R. Gaines, has denied Glenn W. Merrick's motion for pro hac vice admission to represent Nu-South Industries, Inc. in its Chapter 7 bankruptcy proceedings due to significant conflicts of interest. Merrick, from the law firm Davis, Graham and Stubbs, sought to act as co-counsel alongside the debtor's current attorney, Stephen H. Leech, Jr., despite not being licensed in Mississippi. 

Key facts include that Nu-West Industries, Inc. is the sole shareholder of Nu-South and is a major unsecured creditor, holding claims amounting to $43,243,000—97% of the unsecured claims. Additionally, both entities are joint obligors on a defaulted debt to John Deere Industrial Equipment Company, which is crucial for operations concerning contaminated water treatment. The debtor's facility relies on a steady natural gas supply, with a contract negotiated by Nu-West's Vice President on behalf of Nu-South. Furthermore, Winthrop Resources Corporation is listed as a lessor of equipment, with obligations tied to Nu-West. Notably, Steven Gampp, an officer of the debtor, has held similar positions with Nu-West, underscoring the intertwined relationships that create the identified conflicts of interest.

Mr. Gampp testified that Craig Harlen, President of Nu-West, and other Nu-West executives held similar positions with the debtor. Administrative functions, particularly marketing, were conducted by Nu-West on behalf of the debtor, with sales staff selling goods and charging the debtor through inter-company allocations. Authorized signatories for the debtor's accounts included Nu-West officers, but no evidence of improper control over these accounts has been presented. Both entities filed consolidated tax returns and Nu-West arranged a master insurance policy covering all subsidiaries, billing them their proportional share of premiums. 

A subsidiary of Nu-West, Nu-Gulf Industries, incurred liabilities totaling approximately $260,000 for which the debtor is responsible due to received products or services. Nu-West is classified as an insider under the Bankruptcy Code, and payments were made by the debtor to Nu-West within one year before the bankruptcy filing, with allegations that Nu-West provided credit when other sources were unavailable. Additionally, Nu-West guaranteed legal fees for Mr. Merrick on behalf of the debtor, and both are co-defendants in a pending lawsuit.

The legal issue at hand is whether a conflict of interest exists that necessitates the disqualification of Glenn W. Merrick and his firm from representing the debtor, given that another law firm, Davis, Graham and Stubbs, represents Nu-West simultaneously. The standards for professional employment in bankruptcy require strict adherence to conflict of interest guidelines, with any reasonable doubt leading to disqualification, according to established case law and the ABA Code of Professional Responsibility.

Mr. Merrick’s law firm has represented Nu-West and seeks to additionally represent Nu-South in a Chapter 7 proceeding. His motion to be admitted pro hac vice did not disclose this dual representation, which was first brought to the Court’s attention by Mississippi Chemical Corporation, Nu-South's largest secured creditor. The law mandates that debtor's counsel must assist the trustee, and dual representation raises significant conflict of interest concerns that could harm other creditors. Key questions raised by Mississippi Chemical Corporation highlight potential conflicts, such as whether Mr. Merrick could act against Nu-West’s interests regarding preference actions, claims objections, and investigations into obligations owed by Nu-Gulf or Nu-West. Legal precedent indicates that any doubt regarding conflicts of interest should lead to disqualification. Citing the First Circuit’s criteria for disqualification, Mississippi Chemical Corporation argues that Mr. Merrick represents multiple clients with differing interests and has not received the necessary consent from the trustee regarding his dual representation, which was only disclosed after an objection was filed.

Authority to deny Mr. Merrick’s motion is grounded in Canon 5 and Canon 9 of the ABA Model Code of Professional Responsibility, which emphasize the necessity for lawyers to exercise independent professional judgment and avoid any appearance of impropriety. The Court is bound by disciplinary rules and ethical considerations outlined in the rebuttal brief of Mississippi Chemical Corporation. Although Section 327(a) of the Bankruptcy Code typically does not apply to Chapter 7 cases, the extraordinary circumstances of this case warrant disqualification based on ethical standards. Granting Mr. Merrick's motion would create a conflict of interest, as he would represent both the debtor and Nu-West, a creditor with multiple ties to the debtor. The debtor is currently represented by Phelps Dunbar, which is being paid by Nu-West, raising concerns regarding potential influences on debtor's counsel. All parties involved must remain vigilant to ensure that the payment of fees does not compromise the independence of the debtor's counsel. A separate order will be issued under Federal Rule of Civil Procedure 58 and Bankruptcy Rule 9021.