In re Ridgeway

JUDGE DODD
CHAPTER 11

MEMORANDUM OPINION ON APPLICATIONS FOR COMPENSATION

Adams and Reese, LLP ("A&R") seeks $967,776.76 in fees and costs for representing the debtor in his individual chapter 11 case as well as in an appeal before the United States Court of Appeals for the Sixth Circuit. Stryker Corporation and Howmedica Osteonics ("Stryker") object to the application. The court awarded A&R $282,811.02 on an interim basis¹ and after an evidentiary hearing ordered the parties to file supplemental memoranda.

This memorandum opinion comprises the court's reasons for awarding A&R $552,238.00 total compensation and $21,070.39 in expenses on a final basis for the two applications.

Christopher Martin Ridgeway's contentious chapter 11 case concluded with a confirmed plan of reorganization fully paying all but one allowed pre-bankruptcy claim. Stryker, the debtor's sole remaining unpaid creditor, holds an unliquidated unsecured claim based on a

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federal trial court judgment against Ridgeway and his wholly owned business, Stone Surgical, LLC, for $745,195.00.²

Stryker sued Ridgeway in the United States District Court for the Western District of Michigan in September 2013 for misappropriating trade secrets and breaching a non-competition agreement. Two months later, Ridgeway and Stone Surgical sued Stryker and Howmedica in the Eastern District of Louisiana alleging violations of the Louisiana Unfair Trade Practices Act, fraud, unjust enrichment and tortious interference with a business relationship and contract. The Louisiana lawsuit was transferred to Michigan and, after consolidation with Stryker's lawsuit, tried to a jury verdict in favor of Stryker. The Michigan trial court entered judgment in Stryker's favor for $745,195.00 and dismissed the claims of Ridgeway and Stone Surgical. Ridgeway filed chapter 11 shortly after the verdict, retaining A&R as his bankruptcy lawyers.

Ridgeway and Stone Surgical later hired A&R partner Louis LaCour to appeal the trial court judgment.³ A&R has billed Ridgeway $481,774 in fees and costs for its appellate work. The law firm does not seek payment from Stone Surgical for any of its fees for the appeal, even though Stone Surgical was a joint appellant.

Stryker's prepetition unsecured claim for attorney fees has not yet been determined and paid.⁴ Until the debtor pays Stryker's claim in full, it is unnecessary to speculate about the ways

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in which the confirmed plan may miscarry.⁵ The court thus confirms its oral ruling at the evidentiary hearing that Stryker has a pecuniary interest in the payment of A&R's fees and therefore standing to object to the application.⁶

Stryker objects to A&R's fees on several grounds. Its unresolved objections as of the evidentiary hearing were:⁷

1. A&R was not authorized to represent the chapter 11 debtor in his appeal and fees for that work should be disallowed.

2. Even if A&R's engagement included the appellate work, the bankruptcy estate should not bear all the fees for the appeal because A&R simultaneously represented Stone Surgical, a co-appellant and debtor's affiliate.

3. A&R is not entitled to payment at paralegal rates for administrative or clerical work.

4. A&R is not entitled to compensation for services for which time entries are redacted or vague or for which excessive time was billed.⁸

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All but one of Stryker's challenges have merit.

1. A&R Did Not Require Specific Permission to Represent Ridgeway on Appeal

The easiest challenge to dispose of is Stryker's complaint that A&R was not authorized to represent the debtor in its appeal of the adverse judgment to the Sixth Circuit.

A&R's application to be employed as Ridgeway's lawyers stated that, among other things, A&R was to appear in court to represent the debtor's interests and, more generally, to represent the debtor in all litigation.⁹ The order authorizing the firm's employment included the same language¹⁰ so A&R had permission to represent the debtor in possession in the appellate court.

2. A&R's Simultaneous Representation of the Debtor and His LLC is Problematic

The second challenge to A&R fees is more problematic. Stryker argues that A&R is not entitled to full compensation from Ridgeway for representing both the debtor and his wholly owned business in the appellate court.

Professionals seeking to be employed by chapter 11 debtors in possession must disclose, among other things, "all of the person's connections with the debtor, creditors, any other party in interest, [and] their respective attorneys and accountants...." FED R. BANKR. P. 2014(a). The duty to disclose those connections continues throughout the chapter 11 case.¹¹

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A&R does not deny that it failed to amend its Rule 2014 disclosure to reveal its joint representation of Stone Surgical in the appeal. Rather, it responds that its simultaneous dual representation is inconsequential for three reasons:

1. Stryker, the objecting party, knew of the firm's joint representation.

2. A&R was not obliged to disclose its undertaking for Stone Surgical because the debtor owned the company.

3. A&R had no duty to disclose the dual representation because Stone Surgical is not a "party in interest" within the meaning of FED. R. BANKR. P. 2014(a).¹²

None of these arguments is persuasive.

Bankruptcy Code section 327 governs the hiring of professionals to be compensated from the chapter 11 bankruptcy estate.¹³ Section 327 required A&R to be a disinterested person, which is defined in Bankruptcy Code section 101(14)¹⁴ as one that:

(A) is not a creditor, an equity security holder, or an insider;

(B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and

(C) 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.

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A professional required by the Code to be disinterested runs a risk if it ceases to be a disinterested person at any point during its engagement in the chapter 11 case. If that happens, its employment may be terminated, it may lose the right to seek compensation from the bankruptcy estate and may even be ordered to disgorge prior payments from the estate.¹⁵

Critical to the analysis of A&R's disinterestedness is Stone Surgical's guaranty of payment of Ridgeway's fees to A&R. A&R did disclose that guaranty in its initial disclosure of the source of its compensation for representing the debtor in possession;¹⁶ but it did not amend the disclosure after Stone Surgical hired it for the appeal. Its failure to amend the disclosure is important because Stone Surgical is an insider of Ridgeway within the meaning of Bankruptcy Code section 101(31).¹⁷

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Applicants for employment as chapter 11 debtor's counsel must disclose all connections with the debtor and other parties in interest.¹⁸ An application to retain counsel filed under 11 U.S.C. §327 and Fed. R. Bankr. P. 2014 must set forth any connection the applicant may have with the debtor, insiders or others that may render it other than disinterested.¹⁹ It is not for the applicant to decide what is appropriate for disclosure.²⁰ Failure to disclose connections that bear on counsel's disinterestedness may have consequences during the case if the lack of disinterestedness, and the failure to disclose, later come to the court's attention.²¹ Waldron v. Adams & Reese, L.L.P. (Matter of American Int'l Refinery, Inc.), 676 F.3d 455 (5th Cir. 2012). The Fifth Circuit wrote in American Int'l Refinery, Inc.:

The disclosure requirements of Rule 2014(a) are broader than the rules governing disqualification, and an applicant must disclose all connections regardless of whether they are sufficient to rise to the level of a disqualifying interest under Section 327(a).... Courts may deny all compensation to professionals who fail to make adequate disclosure, and "counsel who fail to disclose timely and completely their connections proceed at their own risk because

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failure to disclose is sufficient grounds to revoke an employment order and deny compensation."

676 F.3d 465-6, citing I.G. Petroleum, L.L.C v Fenasci (In re West Delta Oil Co, Inc.), 432 F.3d 347, 355 (5th Cir. 2005).

A&R's detailed application to be hired as Ridgeway's lawyers²² belies its claim that it was not required to amend its disclosure to reveal its appellate representation of Stone Surgical. The firm revealed there its connections with former and current creditors, listing no fewer than eight current and former clients that are creditors in the case including Stryker Corporation. If A&R believed it had a duty to reveal those relationships when it took up representing the chapter 11 debtor in possession, a fortiori it should have revealed its relationship with Stone Surgical once A&R undertook representing Stone on appeal.²³

Finally, A&R makes an ill-judged argument that it needn't have disclosed its representation of Stone because the LLC was not a party in interest. A&R's digression to explore the metes and bounds of that term is unnecessary: as a pre-bankruptcy guarantor of A&R's fees, Stone was a surety.²⁴ Stone Surgical held at all relevant times a contingent claim against the debtor for reimbursement of payment on A&R's fees.²⁵ Hence, it is a creditor and "party in

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interest" in the debtor's case.²⁶ A&R therefore should have supplemented its original Rule 2014 disclosure to reveal the firm's simultaneous representation of Stone Surgical in the appeal.

A&R apparently now suggests now that even if the Code and Rules required it to amend its disclosure, it only failed through "inadvertent oversight." The firm explains that it didn't amend its disclosure in...