In re Grinding Specialists, LLC

625 B.R. 6

IN RE, GRINDING SPECIALISTS, LLC, Debtor(s).

In re, Grinding Specialists of the Carolinas, LLC, Debtor(s).

In re, Callahan Grading LLC, Debtor(s).

C/A No. 18-05225-HB

C/A No. 18-05223-HB (Substantively Consolidated)

C/A No. 18-05220-HB

United States Bankruptcy Court, D. South Carolina.

Entered: February 3, 2021

Robert H. Cooper, The Cooper Law Firm, Greenville, SC, for Debtor(s).

ORDER APPROVING TRUSTEES' EMPLOYMENT OF JAMES, McELROY & DIEHL, P.A. PURSUANT TO 11 U.S.C. § 327(e)

HELEN E. BURRIS, Chief US Bankruptcy Judge

THIS MATTER involves the above-captioned bankruptcy cases and litigation pending in the United States District Court for the Western District of North Carolina before the Honorable Graham C. Mullen, captioned Keith Hawthorne, KLH Acquisition Company, LLC, Rivercross Capital, LLC, Rufus Road Partners, LLC, Janet B. Haigler in her Capacity as Chapter 7 Trustee for Callahan Grading, LLC, and Robert F. Anderson in his Capacity as Chapter 7 Trustee for Grinding Specialists of the Carolinas, LLC and Grinding Specialists, LLC v. Callahan Grading, LLC, Grinding Specialists of the Carolinas, LLC, Grinding Specialists, LLC, High Tension Ranch, LLC, Anthony Jarrett Callahan, The Howey Co., Inc., Camden Land Co., LLC, STGE Investments, LLC, Deepe, LLC, FM Capital, LLC, and David S. Howey , C/A No. 3:20-cv-564 ("NC Litigation"). Before the Court is a Motion filed by Robert F. Anderson as Chapter 7 Trustee for the substantively consolidated bankruptcy estates of Grinding Specialists, LLC and Grinding Specialists of the Carolinas, LLC, and Janet B. Haigler as Chapter 7 Trustee for the bankruptcy estate of Callahan Grading LLC (collectively, "Trustees") on January 15, 2021, seeking approval to employ the Law Firm of James, McElroy & Diehl, P.A. ("NC Counsel") and requesting other relief.¹ The Howey Co., Inc., Camden Land Co., LLC, STGE Investments, LLC, DEEPE, LLC, FM Capital, LLC, and David S. Howey (the "Howey Entities") opposed the Motion.² The Court considered the exhibits,³ the Declaration of attorney John R. Buric, the testimonies of Trustee Anderson, Trustee Haigler, and Buric, the recording of a hearing held in this Court on April 14, 2020,⁴ and the case dockets and various pleadings.

PROCEDURAL HISTORY AND FINDINGS OF FACT

I. THE BANKRUPTCY CASE

The above-captioned Debtors filed voluntary petitions for Chapter 11 relief on October 15, 2018. The cases were converted to Chapter 7 in March 2019 and the Trustees were appointed. In May 2019, Trustee Haigler's employment of the Gleissner Law Firm LLC was approved pursuant to 11 U.S.C. § 327(a).⁵ In June 2019, Trustee Anderson's employment of Nelson Mullins Riley & Scarborough, LLP ("NMRS") was approved pursuant to § 327(a). A review of the relevant bankruptcy case dockets indicates the Trustees have since utilized these attorneys to represent them in various matters, including those related to the NC Litigation.

In March 2020, the Trustees' attorneys requested approval of a settlement in each bankruptcy case whereby they sought to resolve disputes involving competing proofs of claim filed by the Trustees, and to resolve and establish the claims of KLH Acquisition Company, LLC, Rivercross Capital, LLC, The Village at Sherrills Ford, LLC, and Rufus Road Partners, LLC (collectively, "Claimants").⁶ The settlement agreement stated the Trustees and Claimants also executed a Joint Defense and Prosecution Agreement ("JPA") to facilitate the settlement, which memorialized the parties' agreement to work jointly to pursue the recovery of alleged fraudulent transfers and other claims against multiple defendants. The settlement agreement provided that any proceeds from this joint litigation, after payment of the Claimants' attorney's fees and costs, would be distributed 50% to the Claimants and 25% each to Trustee Anderson and Trustee Haigler.

The JPA provides its parties and their counsels will cooperate, communicate, and work together in the joint prosecution to coordinate strategy and address issues they deem to be of common interest in connection with the litigation brought by them, and information shared and communications among the JPA parties and their counsel are to be confidential and protected by the applicable privilege. However, the JPA expressly states it does not create an attorney-client relationship between one party and counsel for another, and any such relationship shall be determined by separate independent agreements. The JPA is signed by Trustee Anderson, Trustee Haigler, and Keith Hawthorne both individually and on behalf of the other parties to the agreement. Page 8 of the JPA is titled "Exhibit A" and lists the following as the JPA parties' counsel: Richard R. Gleissner and Luke R. Gleissner of the Gleissner Law Firm for Trustee Haigler; Brandon Keith Poston of NMRS for Trustee Anderson; Will Esser of Parker Poe, LLC for KLH Acquisition Company, LLC, the Village at Sherrills Ford, LLC, KLH Real Property Holdings, LLC, and Rivercross Capital, LLC; and John R. Buric of NC Counsel for Keith Hawthorne, Campground 64, LLC, and Rufus Road Partners, LLC.⁷

At the April 14, 2020, telephonic hearing to consider the proposed settlement, the Trustees provided evidence and arguments that its terms were favorable and in the best interests of their estates, which otherwise do not have sufficient funds to pursue this contemplated litigation. All objections were resolved and the Consent Order Approving Settlement Agreement ("Consent Order") was entered on April 16, 2020.⁸ The Consent Order authorized the parties to enter the proposed settlement, granted Claimants an allowed claim in both bankruptcy cases in the amount of $5,369,402.52, and set forth the procedure for the distribution of any Net Litigation Proceeds (as that term is defined in the settlement agreement) recovered in litigation the parties jointly prosecute (defined in the Consent Order as the "Jointly Prosecuted Litigation"). It also incorporated language the United States Trustee requested requiring that prior to the disbursement of any Net Litigation Proceeds, the Trustees file a notice in their respective estates under Fed. R. Bankr. P. 9019 specifying how the Net Litigation Proceeds are calculated in order to review the reasonableness of fees and expenses incurred by Claimants in the Jointly Prosecuted Litigation. The Consent Order specifically provided "the parties may enter into other agreements to govern the terms of the Jointly Prosecuted Litigation, but any such agreements have not been approved by this Court." A review of the recording of that hearing and the docket clearly indicate the JPA itself was discussed, but no employment of new counsel was requested, and no attorney-client relationship was formed between its parties at execution of the JPA. Much of the JPA dealt with provisions regarding discovery and attorney-client privilege that would only involve this Court if the litigation was ultimately pursued here. Thus, approval of many terms of the JPA by this Court would have been premature and perhaps inappropriate as, at that time, the parties had not yet decided the proper forum for the Jointly Prosecuted Litigation.

II. NC LITIGATION

October 9, 2020, a complaint was filed initiating the NC Litigation and signed (/s/) only by Buric as "Attorneys for Plaintiffs." The Debtors were named as defendants but were voluntarily dismissed shortly thereafter. As relevant here, the complaint seeks the avoidance and recovery of transfers exceeding $16,000,000.00 relying on bankruptcy law and the rights and powers of the Trustees. On November 17, 2020, Poston, Luke Gleissner, and Richard Gleissner requested pro hac vice admission in the NC Litigation on behalf of the Trustees. Judge Mullen granted the motions on November 18, 2020, pursuant to Local Rule 83.1(b) (W.D.N.C.), with Buric associated as local counsel. On January 5, 2021, the Howey Entities filed a motion to dismiss the complaint, asserting Buric and NC Counsel did not have this Court's authority to represent the Trustees and bankruptcy estates when the complaint was filed, and rectifying this issue is futile because the statute of limitations has passed. See 11 U.S.C. § 546(a).

III. THE TRUSTEES' MOTION BEFORE THIS COURT

The Trustees' returned to this Court with a Motion that requests clarification of the prior Consent Order or, alternatively, approval to employ NC Counsel as special local counsel to the Trustees in the NC Litigation to fulfill all obligations required under Local Rule 83.1 (W.D.N.C.), nunc pro tunc to April 16, 2020.⁹ A hearing was held on January 21-22, 2021.

The testimony made clear the Trustees and their counsel, together with NC Counsel, have worked together to pursue the NC Litigation. At some point after the Consent Order, an attorney-client relationship was formed between the Trustees and NC Counsel and the Trustees intended for NC Counsel to serve as their local counsel. Trustees reviewed the substance and authorized the filing of the complaint in the NC Litigation, and prior inclusion of the Debtors in the case caption of the NC Litigation was in error. The pro hac vice admissions in the NC Litigation further evidence the Trustees' intent for NC Counsel to act as local counsel.

Although employment terms are best included in a clear, concise document of a certain date, basic terms of engagement can be ascertained here, and the parties agree the terms regarding compensation are those found in the settlement agreement, as conditioned by the Consent Order. Employment of NC Counsel is essential and in the best interests of these estates. Buric's Declaration, included with the Motion, explains that the interests of the Claimants and the Trustees are aligned, NC Counsel researched its client database and determined it does not hold any interests adverse to the estates, and NC Counsel disclosed any relevant connections to the Court. Buric testified in support of the Motion that although Keith Hawthorne – who...