Weinstein, Eisen & Weiss v. Katzman (In re Lincoln Hospital Medical Center, Inc.)

Citation: 234 F. App'x 426Docket: No. 05-55891

Court: Court of Appeals for the Ninth Circuit; April 18, 2007; Federal Appellate Court

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WEW appeals the district court’s affirmation of a bankruptcy court order rejecting Lincoln Hospital Medical Center's application to employ WEW as its Chapter 11 counsel. At the time of Lincoln's bankruptcy filing in November 2002, John J. Carvelli was the president and a one-third owner, while Bryan Weiss served as treasurer and CFO. Concurrently, WEW represented another Chapter 11 debtor, California Psychiatric Management Services (CPMS), where Carvelli and Weiss had previously served on the post-petition management committee. They were implicated in a lawsuit filed by CPMS’s unsecured creditors, alleging theft of $1.5 million. A stipulated order required CPMS to assist its creditors in litigation, with Weinstein identified as a potential witness.

Both the CPMS creditors committee and the U.S. Trustee objected to WEW’s employment for Lincoln, leading the bankruptcy court to deny the application. The Bankruptcy Appellate Panel of the Ninth Circuit upheld this decision, and the district court later affirmed the bankruptcy court's denial. WEW's appeal to the district court is under the jurisdiction granted by 28 U.S.C. 158(d)(1), with an independent review standard that involves assessing the bankruptcy court's decision for abuse of discretion.

To qualify as a debtor’s attorney under 11 U.S.C. 327(a), an attorney must not hold an adverse interest and must be disinterested. The U.S. Trustee presents two arguments against WEW’s employment: first, a potential for Carvelli and Weiss to overpay WEW to influence its support against the $1.5 million claim, though this lacks evidentiary support; second, a stronger argument regarding the adverse interest posed by WEW's involvement. The excerpt indicates that while the first claim lacks evidence, the second reason remains a persuasive concern against WEW's appointment.

WEW, representing CPMS, was required to assist the CPMS creditors committee in maximizing damages against Carvelli and Weiss. Conversely, in Lincoln's bankruptcy, WEW's role would involve collaborating with Carvelli and Weiss to enhance creditor payments. Any informal support or potential testimony by Weinstein against Carvelli and Weiss could lead to conflicts with Lincoln's management, hindering WEW's ability to work constructively with them. The district court recognized the impracticality of WEW simultaneously advocating against Carvelli and Weiss in the CPMS case while cooperating with them in Lincoln's bankruptcy. The mere risk of impaired collaboration justified the bankruptcy court's discretion in rejecting Lincoln's application to employ WEW as counsel. This conclusion does not reflect negatively on WEW's lawyers. The case disposition is not published or precedential, and a 2005 amendment to the Bankruptcy Code did not change the relevant legal analysis. Although WEW argued that Carvelli and Weiss had been out of the CPMS case for five months before Lincoln's bankruptcy, this assertion lacked support from the record, which showed ongoing litigation against them at the time of Lincoln's bankruptcy filing. The resignation of Carvelli and Weiss from the CPMS management committee did not eliminate the risk of adverse actions from Weinstein in the CPMS case, which could compromise WEW’s effectiveness in representing Lincoln’s interests.