In re Ryan-Jones

Citations: 561 B.R. 380; 2016 Bankr. LEXIS 2331; 62 Bankr. Ct. Dec. (CRR) 204Docket: Case No. 16-11026-RGM

Court: United States Bankruptcy Court, E.D. Virginia; June 20, 2016; Us Bankruptcy; United States Bankruptcy Court

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The court is considering an application by H. Jason Gold, the chapter 7 trustee, to retain Nelson Mullins Riley Scarborough LLP as counsel for the sale of a property owned by the Debtor at 728 N. Watford Court, Sterling, Virginia. The trustee disclosed that he is a member of the law firm, which also represents several creditors of the estate, including Seterus and Specialized Loan Servicing, who hold liens against the property. The application raises the issue of whether the firm represents an interest adverse to the estate as outlined in 11 U.S.C. § 327(a).

The trustee's Verified Statement indicated the firm’s involvement and the presence of liens on the property, prompting the court to schedule a hearing to address these potential conflicts. The trustee filed a motion to approve the sale of the property, asserting that the liens would be settled in full at closing.

The legal framework under § 327 requires that a trustee may only employ professionals who do not hold or represent interests adverse to the estate and are disinterested. However, § 327(c) provides an exception allowing a trustee to employ an attorney representing a creditor if there is no actual conflict of interest. The court has the authority to disqualify a professional based on simultaneous representation if it finds an actual conflict exists, despite potential or perceived conflicts that would typically disqualify an attorney under § 327(a).

The District Court elaborated on the concept of 'actual conflict of interest,' noting that it is not explicitly defined in the Bankruptcy Code and has been interpreted through case-by-case assessments. Courts exercise significant discretion in determining the existence of an actual conflict based on the specific facts of each case, as highlighted in prior rulings. An alleged conflict is deemed 'actual' and merits disqualification under § 327(c) only if there is direct competition between interests or if one interest is unjustly favored over others. A mere potential conflict, which may arise under certain conditions, does not justify disqualification. Additionally, the court emphasized that an attorney employed by both a trustee and a creditor does not face disqualification unless the trustee's and creditor's interests are directly conflicting or if the creditor receives preferential treatment over others. The court's analysis also included considerations of divided loyalties and the potential for compromised judgment. Disqualification is warranted if there is a significant incentive for the attorney to act against the interests of the estate and its creditors or if there is a reasonable perception of such a conflict. In the context of a chapter 7 trustee's ability to retain their own law firm for the sale of real property, the court noted that while the sale process is straightforward, the determination of liens' extent and validity must be handled carefully, as sales primarily benefit unsecured creditors rather than secured ones.

In cases where there is no equity in real property, trustees typically do not manage it, leaving secured creditors to enforce their own claims. In this instance, the trustee abandoned two properties and is advised to scrutinize the secured creditors' liens for potential infirmities and verify the accuracy of payoff amounts, despite potential conflicts with lenders asserting lien validity. Recent concerns about lender credibility due to past practices highlight the need for the trustee to have independent counsel to examine these issues impartially. The trustee’s interests may conflict with those of the secured creditors, as any actions taken to reduce or avoid the secured creditors' liens may benefit unsecured creditors at the expense of the secured ones. The application to employ counsel was denied due to the trustee's law firm representing several creditors of the estate, raising concerns of conflict of interest. Furthermore, the trustee had previously filed a Notice of Abandonment for the two properties without any objections, which are now officially abandoned. The United States Trustee's Handbook indicates that trustees generally should not sell encumbered property unless it benefits unsecured creditors, although exceptions may allow for the sale if it could satisfy a blanket security interest or yield higher overall returns.

A trustee may sell fully encumbered property to address a deficiency for unsecured creditors if the secured creditor waives any claim for that deficiency if the sale does not cover the security interest. The trustee's counsel argues that 11 U.S.C. § 327(c) allows a creditor’s attorney to represent the bankruptcy estate, but this argument overlooks that the exception only applies when there is no actual conflict of interest, which exists in this case. The counsel did not assert that only another creditor or the United States Trustee can invoke the actual conflict of interest provision. Under Section 327(c), if there is an actual conflict and another creditor or the United States Trustee objects, the application must be denied. The statute does not imply that the court must approve an application simply because there is no objection. The court has the authority to independently review and approve or deny applications based on propriety, regardless of objections.