In re Faith Cathedral Look Up & Live Ministries, Inc.

622 B.R. 831

IN RE: FAITH CATHEDRAL LOOK UP AND LIVE MINISTRIES, INC., Debtor(s).

C/A No. 20-03333-HB

United States Bankruptcy Court, D. South Carolina.

Signed October 8, 2020

Robert A. Pohl, Pohl, P.A., Jason Michael Ward, Jason Ward Law, LLC, Greenville, SC, for Debtor

Linda Barr, Office of United States Trustee, Columbia, SC, for U.S. trustee

ORDER DENYING APPLICATION TO EMPLOY BANKRUPTCY COUNSEL

Chief US Bankruptcy Judge District of South Carolina

THIS MATTER is before the Court on the Application to Employ Bankruptcy Counsel filed by Debtor Faith Cathedral Look Up and Live Ministries, Inc., seeking to employ Pohl, P.A. (the "Attorney") pursuant to 11 U.S.C. § 327.¹ The United States Trustee filed an Objection, asserting conflict of interest issues arising from pre-petition conduct of the Attorney.²

On August 23, 2020, the Attorney prepared a promissory note, security agreement and UCC-1 Financing Statement to memorialize an alleged March 12, 2017, loan in the amount of $250,000.00 by the founder and senior pastor of the Debtor, Ethel M. Talbert-Spearman. The transaction had not been in writing before that time, although the new promissory note and security agreement are dated March 12, 2017. The Attorney filed the UCC-1 Financing Statement on August 23, 2020. The next day, on August 24, 2020, the Attorney filed a voluntary petition for Chapter 11 relief for the Debtor. A proposed cash collateral budget, including a payment to Ms. Talbert-Spearman toward this debt balance, was filed on August 27, 2020.³

The information regarding the loan documents drafted and filed for Ms. Talbert-Spearman was not included in the Attorney's Application to Employ or supporting Bankruptcy Rule 2014 Statement. This information was later disclosed after the UST requested details regarding the method in which the Attorney conducted a conflict check. After the UST filed its Objection on September 3, 2020, the Attorney filed an Amended Bankruptcy Rule 2014 Statement disclosing the work performed for Ms. Talbert-Spearman.⁴

Debtor's original Schedules filed on September 17, 2020, listed Ms. Talbert-Spearman as a secured creditor with a claim in the amount of $250,000.00, of which $5,000.00 is secured by collateral. The claim was not marked as contingent, unliquidated, or disputed.⁵ Additionally, the transfer and documentation in favor of Ms. Talbert-Spearman was omitted from the Debtor's Statement of Financial Affairs.

An initial hearing on this matter was held on September 22, 2020, and continued to October 6, 2020. At the continued hearing, the Attorney reported that he filed a UCC-3 Financing Statement Amendment to remove the security interest of Ms. Talbert-Spearman. Amended Schedules were also filed to move Ms. Talbert-Spearman's claim from Schedule D to Schedule E/F and to disclose the transfer to her in the Statement of Financial Affairs.⁶ Despite these corrective measures, the UST still raises concerns over the Attorney's actions adverse to the estate and potential for other conflicts of interest during the pendency of this case.

"In enacting the Bankruptcy Code, Congress entrusted the power to approve the appointment of professionals to work on behalf of a bankruptcy estate to the discretion of the bankruptcy courts." In re Harold & Williams Dev. Co. , 977 F.2d 906, 909 (4th Cir. 1992). Section 327 provides the debtor-in-possession, with the court's approval, may employ an attorney that: (1) does not hold or represent an interest adverse to the estate; and (2) is disinterested. 11 U.S.C. § 327(a). This provision is intended to ensure "all professionals ... tender undivided loyalty and provide untainted advice and assistance in furtherance of their fiduciary responsibilities." In re Johnson, 312 B.R. 810, 819 (E.D. Va. 2004) (citing Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir. 1994) ).

A "disinterested person" is defined by the Code as a person who "does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason." 11 U.S.C. § 101(14)(C).

[T]o hold an interest adverse to the estate means (1) to possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival or claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate.

To represent an adverse interest means to serve as an agent or attorney for any individual or entity holding such an adverse interest.

In re Worldwide Wholesale Lumber, Inc. , 364 B.R. 197, 201-02 (Bankr. D.S.C. 2006) (quoting In re Air South Airlines, Inc. , C/A No 97-17229-W, 1998 WL 34020727, at *7 (Bankr. D.S.C. Jan. 16, 1998) ). This " ‘catch all’ provision is broad enough to exclude a [professional] with some interest or relationship that ‘would even faintly color the independence and impartial attitude required by the Code.’ " In re AFI Holding Inc. , 530 F.3d 832, 846 (9th Cir. 2008) (quoting Kravit, Gass & Weber, S.C. v. Michel (In re Crivello) , 134 F.3d 831, 835 (7th Cir. 1998) ). Thus, "if, for any reason, the attorney has an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders he or she may not serve as attorney for the Chapter 11 debtor." In re Rabex Amuru , 198 B.R. 892, 895 (Bankr. M.D.N.C. 1996) (emphasis in original).

Additionally, § 327(c) governs scenarios where the attorney also represents a creditor. "[A] person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest." 11 U.S.C. § 327(c). An actual conflict of interest is not defined by the Code and courts have not established bright line rules as to when an actual conflict exists. See Johnson , 312 B.R. at 822. However, courts have concluded that "an alleged conflict of interest is ‘actual’ and warrants disqualification under § 327(c) if there is ‘active competition between two interests, in which one interest can only be served at the expense of the other.’ " Id. (quoting In re BH & P, Inc. , 103 B.R. 556, 563 (Bankr. D.N.J. 1989), aff'd 949 F.2d 1300 (3d Cir. 1991) ). Regardless, § 327(c) does not " ‘preempt the more basic requirements of subsection (a),’ and thus the court must still ‘determine whether the person is disqualified on any other ground, e.g., an interest adverse to the estate.’ " In re Gregory & Parker, Inc. , C/A No. 12-01382-8-SWH, 2013 WL 1279405, at *2 (Bankr. E.D.N.C. Mar. 28, 2013) (quoting In re AroChem Corp. , 176 F.3d 610, 621 (2d Cir. 1999) ).

The Debtor bears "the burden of demonstrating that an applicant for professional employment is qualified under § 327 ..." Harold & Williams Dev. Co. , 977 F.2d at 910, which is typically accomplished through the required disclosures under Fed. R. Bankr. P. 2014(a). An application to employ counsel must provide, inter alia :

any proposed arrangement for compensation, and, to the best of the applicant's knowledge, all of the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee. The application shall be accompanied by a verified statement of the person to be employed setting forth the person's connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.

Fed. R. Bankr. P. 2014(a). "Requiring such specific disclosures before the approval of the Court indicates the importance of having a ‘disinterested person’ represent the debtor and the estate." In re Kobe Real Estate, LLC , C/A No. 11-03591-HB, 2011 WL 3880390, at *5 (Bankr. D.S.C. Aug. 31, 2011).

Once the...