In Re Georgetown of Kettering, Ltd., Debtor.hunter Savings Association, Plaintiff-appellant, v. Baggott Law Offices Co., L.p.a.; Frederic E. Gagel; Andgarrett H. Frey, Defendants-appellees, 750 F.2d 536 (6th Cir. 1984)

This is an appeal from a decision by the United States District Court for the Southern District of Ohio which upheld the bankruptcy court's award of $13,965.00 to the appellee Baggott Law Offices Co., L.P.A. (Baggott), for services rendered to the estate.

There is no dispute as to the following relevant chronology. The underlying bankruptcy proceeding commenced March 4, 1981 with an involuntary Chapter 11 creditor's petition in bankruptcy against Georgetown of Kettering, Inc. (Georgetown). The petition was filed by the Imperial Management Company (Imperial), through its attorney, Horace W. Baggott.

Georgetown was a rental property owned by G.W.F. Investments Ltd. (G.W.F.), one of several partnerships formed by Frederick E. Gagel (Gagel), Steven Williams (Williams), and Garrett H. Frey (Frey) for the purpose of acquiring and operating rental properties. Gagel was also president of Imperial.

G.W.F. was the sole general partner in four limited partnerships thus formed. Each of those partnerships had also been subjected to involuntary creditor's petitions. A further involuntary bankruptcy petition was filed by Gagel against G.W.F. itself.

Previous to the Gagel/Imperial involuntary bankruptcy petition against Georgetown, appellant Hunter Savings Association (Hunter Savings) had foreclosed various notes held against Georgetown and co-makers which totalled $5,150,000.00. These notes were secured by three mortgages against the apartment complex which formed Georgetown's principal asset. When the Chapter 11 proceeding was instituted, the foreclosure action was removed to the bankruptcy court. On September 2, 1981, Hunter Savings was granted judgment on the notes. Hunter Savings Association v. Georgetown of Kettering, Ltd., 14 B.R. 72 (Bankr.S.D. Ohio 1981). Baggott appeared for Georgetown in that adversary proceeding, see 14 B.R. at 73, in which the bankruptcy court stayed the judgment pending the resolution of the Chapter 11 proceedings. 14 B.R. at 81.

Baggott has represented Gagel in each of the latter's many roles in this exceedingly intricate litigation. Gagel filed the schedules on behalf of the debtor Georgetown listing himself as Georgetown's largest unsecured creditor and his company, Imperial, as the second largest. Gagel's personal and Imperial's unsecured claims amounted to $907,000.00, which was in excess of 90% of all the scheduled unsecured claims. Both claims were ultimately disallowed.

On March 10, 1981, in the G.W.F. bankruptcy matter (to which Hunter Savings was not a party) G.W.F.'s petition to employ Baggott as counsel was granted. At this point, Baggott represented Imperial (of which Gagel was president) and Gagel as unsecured creditors in the Georgetown bankruptcy. Also in the Georgetown bankruptcy, Baggott further represented Gagel as a partner in G.W.F., which owned Georgetown. In the adversary proceeding on the foreclosed mortgage notes brought by Hunter Savings against Georgetown, Baggott represented Georgetown, the debtor. In the separate G.W.F. Bankruptcy, Baggott represented Gagel as the creditor who initiated the bankruptcy. Baggott also represented Gagel as a partner in G.W.F., which owned Georgetown and, upon the March 10, 1981 order approving the petition, Baggott also represented the Debtor, G.W.F.¹ 

In the Georgetown case (from which this appeal proceeds), Gagel, Frey, and Hunter Savings proposed separate plans of reorganization. Gagel, through G.W.F., submitted two such plans. Ultimately, on January 25, 1982, the Hunter Savings plan was approved (largely as a result of agreement between Frey²  and Hunter Savings). The Hunter Savings plan released all co-makers of the Georgetown notes, including Gagel, Frey and the Williams estate, in return for title to the Georgetown real estate. "Non-insider" unsecured claims under $2,000.00 would receive 100% and those over $2,000.00 would receive $2,000.00 or 50% of their total claim, at the creditor's option. Under the arrangement, Hunter Savings assumed the administrative expenses of the estate. Because Frey's attorneys had withdrawn their claims for fees and expenses, the only anticipated administrative expense was the $766.13 fee of the attorney employed by a creditor's committee.

On March 5, 1982, some five weeks subsequent to the confirmation of the Hunter Savings plan, Baggott filed a petition for fees in the amount of $22,100.00 for its representation of the debtor in possession. On March 8, Baggott filed a motion for appointment as attorney for the debtor in possession to be entered nunc pro tunc to March 3, 1981. On March 15, 1982, without notice to Frey or Hunter, the bankruptcy court entered an order appointing Baggott as attorney for the debtor in possession nunc pro tunc to March 3, 1981.

On March 16, 1982, Frey filed an objection to the Baggott appointment, which was followed, on June 18, 1982, by the objection of Hunter Savings. A hearing on the fee petition was conducted on June 22, 1982 and the parties were directed to file memoranda. Baggott did not file a timely memorandum, but Hunter Savings did. The bank joined Baggott's failure to comply with 11 U.S.C. § 329(a),³  Bankruptcy Rules 215 and 219,⁴  and Interim Bankruptcy Rule 2006,⁵  as issues in conjunction with the appointment of Baggott and the application for attorney's fees.

On January 5, 1983, the bankruptcy court noted that Baggott had failed to comply with the applicable statutes and rules and sua sponte granted Baggott two weeks to conform. On January 24, 1983, Baggott filed a statement purporting to bring the application and appointment into compliance.

On February 18, 1983, the bankruptcy court allowed Baggott's application for fees (in reduced amount of $13,965.00) whereupon an appeal was taken to the district court. 28 B.R. 120. The district court affirmed and there followed this timely appeal.⁶  34 B.R. 368.

Hunter Savings has asserted that the award of fees to Baggott was improper because of inherent conflicts of interest in Baggott's representation in this case, as well as the law firm's failure to satisfy other requirements of the bankruptcy statute and rules. Section 329(a) requires the applicant attorney to file a statement of compensation paid or contracted for in connection with the case. 11 U.S.C. § 329(a). Under Bankruptcy Rule 219(b), the statement must be filed "on or before the first date set for the first meeting of creditors". At the time Baggott's nunc pro tunc order was granted, no Sec. 329(a) statement had been filed.

A more serious failure of compliance has been noted with respect to the conflict of interest provisions of 11 U.S.C. § 327.⁷  Section 327(c) prohibits the attorney for the debtor from representing a creditor in the case (although by its terms the statute does not preclude representation of a creditor prior to appointment as counsel to debtor). See also Rule 215(c). As noted above, throughout the proceedings Baggott represented all of Gagel's interests, including Gagel as the debtor in possession and as an unsecured creditor.

The district and bankruptcy courts recognized that Baggott's representations posed conflicts of interest problems, but held that Cle-Ware Industries, Inc. v. Sokolsky, 493 F.2d 863 (6th Cir. 1974), did not require disqualification.

In Cle-Ware, this circuit was confronted with a local civil rule in the Northern District of Ohio which mandated separate attorneys for the debtor and debtor in possession. At the time, the Northern District of Ohio was the only jurisdiction with such a rule. The Sixth Circuit disapproved the rule stating that:

This court strongly disapproves the practice of appointing separate counsel as attorney for the debtor-in-possession and at the same time compensating another attorney at the expense of the bankrupt estate in his capacity as counsel for the debtor for services rendered after the filing of a petition for a plan of arrangement. Hereafter we will not approve this procedure as a general practice in the Sixth Circuit. Only in exceptional circumstances, which we do not now foresee, will this procedure be allowed by this court. The debtor and the debtor-in-possession is one and the same person, although "wearing two hats." We see no valid reason why, as a general rule, his legal representation in both capacities should not be limited to one attorney or one set of attorneys. In the ordinary situation, as in the instant case, there is no actual or potential conflict of interest requiring or justifying payment for services of separate attorneys.

While the lower court in this case correctly identified the needless waste of time and expense as the rationale of the Cle-Ware holding, the district court overlooked a substantive distinction. Here Gagel, and hence his attorney, advanced the inherently conflicting interests of creditor and debtor in possession. Section 327(c) does not abide such conflicting employment. The fact that Gagel's creditor interest was subsequently disallowed does not serve to obviate the conflict, as suggested by the district court, but rather enhances the conflict. See Advisory Note to Rule 215(c) ("if there is a question as to the validity or amount of a general creditor's claim, his attorney would be subject to a disqualifying interest").

Because an actual conflict of interest existed, Baggott's application for compensation should have been denied. See Woods v. City National Bank & Trust, 312 U.S. 262, 269, 61 S. Ct. 493, 497, 85 L. Ed. 820 (1941):

[T]he incidence of a particular conflict of interest can seldom be measured with any degree of certainty. The bankruptcy court need not speculate as to whether the result of the conflict was to delay action where speed was essential, to close the record of past transactions where publicity and investigation were needed, to compromise claims by inattention where vigilant assertion was necessary, or otherwise to dilute the undivided loyalty owed to those whom the claimant purported to represent. Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation.

Accordingly, even had Baggott been able to sustain its burden to demonstrate the propriety of the nunc pro tunc appointment, an issue on which this court expresses no conclusion, the compensation would be denied as a result of the conflict of interest. Consistent with this analysis, the district court award of fees from the estate is reversed.