UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
WALLACE
G. WILKINSON CASE NO. 01-50281
DEBTOR
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
JUDGE
COPIES TO:
Debtor
Mary Fullington, Esq.
Barbara Edelman, Esq.
Elizabeth Lee Thompson, Esq.
W. Thomas Bunch, Esq.
Samuel D. Hinkle, Esq.
U.S. Trustee