UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
WALLACE G. WILKINSON CASE NO. 01-50281
OPINION AND ORDER
This matter is before the court upon the Application of the Unsecured Creditors= Committee herein to Employ the Law Firm of Stites & Harbison, PLLC (AStites & Harbison@) as its counsel, and the Objection filed thereto by the debtor on March 29, 2001. Stites & Harbison has supplemented their original affidavit herein with the affidavit of Elizabeth Lee Thompson, attorney, indicating Stites & Harbison=s representation of one secured and three unsecured creditors with claims against various other Chapter 11 debtors in the proceedings of Wallace=s Bookstores, Inc., and related debtors, Cases Nos. 01-50545 thru 01-50606, and 01-51059 thru 01-51065. Those proceedings involve subsidiary or affiliated corporations of Wallace=s Bookstores, Inc, and Wallace=s Book Company, Inc (the AWallace=s cases@). The debtor in this case owned controlling interest in the two latter corporations.
The initial objection filed by the debtor in this matter was based upon the fact that the debtor and one of the partners of Stites & Harbison, who is involved in this proceeding as one of counsel for the committee, opposed each other for political office some 14 years ago. This objection involves the Adisinterestedness@ requirement which, while not a condition for employment by a committee pursuant to 11 U.S.C. '1103, is a requirement for allowance of compensation of such a professional pursuant to 11 U.S.C. '328. This standard normally pertains to financial Adisinterestedness.@ At the April 13, 2001 hearing this court held that this objection was not well taken since there were no specific allegations concerning the disinterestedness standard but only the general information that the two parties opposed each other in a political race many years ago.
The parties have now briefed the question of whether or not the representation by Stites & Harbison of creditors in the Wallace=s cases would be the representation of A...any other entity having an adverse interest in connection with the case...@ as is prohibited by 11 USC '1103(b).
The record reveals that there are multiple claims between the debtor and the Wallace entities including a listed indebtedness of approximately $50,000,000 owing to one or more of the Wallace=s entities by this debtor. This debtor has apparently also asserted the recoverability of sums from the Wallace=s entities and his intention to use the avoidance powers of the Bankruptcy Code to effect those recoveries. Clearly, the likelihood of multiple claims by and between the estates of this debtor and the Wallace=s entities is significant.
In support of his objection to the committee=s hiring of Stites & Harbison, the debtor has cited In the Matter of Proof of the Pudding, Inc., 3 B.R. 645 (Bankr.S.D.N.Y. 1980). In that matter, the court found that the representation by one law firm of unsecured creditors= committees in two related proceedings, in which the debtors had claims against each other, was an not permitted under the statute. While 11 USC '1103(b) has been amended since that case was decided to provide that representation of unsecured creditors in the same case was not a per se adverse interest for attorneys representing the committee, it appears that the logic of the Proof of the Pudding case is still valid. While the present case involves not the representation of two committees, but the representation of the committee in one case and creditors in related cases, it is clear that the likelihood that the interests of Stites & Harbison=s clients in the related proceeding could become adverse to the interests of the committee in this proceeding is substantial. The likelihood of litigation by and between these estates and the fact that recovery by one against the other is, necessarily, diminution of the other, leads the court to conclude that the representation of other creditors in the related cases is an interest adverse to the representation of the committee in this case as that term is used in 11 U.S.C. '1103. As Judge Ryan pointed out in the Proof of the Pudding case, the attorney for the committee does not act in a vacuum and the potential for conflict of interest may be sufficiently real to warrant disallowance of representation of different interests. At page 646. Stites & Harbison should be given an opportunity to withdraw from representation of other creditors in order that it may proceed to represent the committee (if it chooses to do so) in this case in compliance with that section.
Accordingly, it is hereby ORDERED AS FOLLOWS:
1) That Stites & Harbison shall have ten (10) days from the date of this Order within which to file with the court an affidavit indicating its withdrawal from representation of clients in the related cases, upon which event, the court will sustain the committee=s motion to retain Stites & Harbison as attorneys for the committee in this proceeding; and
2) Upon failure to file the affidavit set forth in the preceding paragraph, the court will sustain the debtor=s objection herein.
Dated this day of April, 2001.
BY THE COURT
Mary Fullington, Esq.
Barbara Edelman, Esq.
Elizabeth Lee Thompson, Esq.
W. Thomas Bunch, Esq.
Samuel D. Hinkle, Esq.