Matter of Howe Grain, Inc.

176 B.R. 515 (1994)

In the Matter of HOWE GRAIN, INC., Debtor Richard BUTLER, Trustee, Plaintiff, v. Raymond BANTZ, et al., Defendants.

Bankruptcy No. BK88-41022. Adv. No. A93-4046.

United States Bankruptcy Court, D. Nebraska.

December 13, 1994.

COPYRIGHT MATERIAL OMITTED

David H. Hahn, Lincoln, NE, for Richard Butler, Trustee.

Richard Koehler, Butler, MO, for Raymond Bantz, Clinton S. Bantz, John Blount and Dennis Bantz.

Ben Anderson, Lincoln, NE, for Marvin Caspers.

Terrence Poppe, Lincoln, NE, for Gordon Lee Kuker.

Thomas E. Ferneau, Lincoln, NE, for Fred Allen, Jr.

Paul Conley, Lincoln, NE, for Roger McMann.

MEMORANDUM

JOHN C. MINAHAN, Jr., Bankruptcy Judge.

Before the court is the Motion for Summary Judgment by Defendants Raymond Bantz, Clinton Bantz, John Blount, and Dennis Bantz (Fil. # 82), the Resistance by the Trustee (Fil. # 95), the Motion to Disqualify by the Trustee (Fil. # 107), the Objections to the Motion to Disqualify (Fils. # 109, # 111, and # 113), and the Exception by Defendant Roger McMann to Plaintiff's Brief (Fil. # 104). I conclude that Mr. Richard Koehler, counsel for defendants, Raymond Bantz, Clinton Bantz, John Blount, and Dennis Bantz, should be disqualified from further participation in this case. I also conclude that the Motion for Summary Judgment should be denied.

FINDINGS OF FACT

On June 27, 1988, the assets of Howe Grain, Inc. were seized by the Nebraska Public Service Commission. Howe Grain, Inc. filed Chapter 11 Bankruptcy on October 19, 1988. Defendants were officers and/or directors of Howe Grain, Inc., debtor-in-possession. Mr. Richard Koehler represented the debtor corporation. On April 16, 1990, Howe Grain, Inc. was dissolved by the Secretary of State for the State of Nebraska for failure to pay its Corporate Occupation Tax. The bankruptcy case was converted to Chapter 7 and a trustee was appointed on October 15, 1991. The Chapter 7 trustee commenced this adversary proceeding on April 22, 1993, asserting that the defendants breached their fiduciary duties to the corporation, and seeking a judgment against the defendants jointly and severally in the amount of $1,250,000.00, plus interest. The trustee is represented by Mr. David Hahn for the limited purposes of this adversary proceeding. Mr. Hahn has also represented, and continues to represent creditors of the debtor corporation in actions pending in state court against the officers and directors of Howe Grain, Inc. Defendants Raymond Bantz, Clinton Bantz, John Blount, and Dennis Bantz, represented by Mr. Richard Koehler, have filed a Motion for Summary Judgment, asserting that the action of the trustee is barred by the statute of limitations under either the Nebraska four year statute of limitations for negligence actions, § 25-207, or the Nebraska two year survival statute for actions in regard to dissolved corporations, § 21-20,104.

On September 1, 1994, a Certificate of Revival was issued, indicating that Howe Grain, Inc. had been revived and was a corporation in good standing.

Subsequent to the Motion for Summary Judgment, the trustee filed a Motion to Disqualify seeking to disqualify Mr. Koehler from further representation in this case as a result of a conflict of interest. In response, the defendants assert that Mr. Hahn should also be disqualified.

LEGAL STANDARD FOR SUMMARY JUDGMENT

Summary judgment is properly granted when the court determines that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Federal Rule of Bankruptcy Procedure 7056(c). In making these determinations, the court must view the facts in the light most favorable to the nonmoving party and must give that party the benefit of all reasonable inferences from the facts. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-90, 106 S.Ct. 1348, 1356-57, 89 L.Ed.2d 538 (1986); Kegel v. Runnels, 793 F.2d 924, 926 (8th Cir.1986).

DISCUSSION

I conclude that Mr. Koehler has an impermissible conflict of interest and should be disqualified in this case. I also conclude that the Motion for Summary Judgment should be denied as a result of Mr. Koehler's conflict of interest through previous representation of the debtor-in-possession.

Motion to Disqualify

Mr. Koehler previously represented the debtor-in-possession, Howe Grain, Inc., at the time the Chapter 11 bankruptcy was filed in October of 1988. As a result, Mr. Koehler became aware of potential claims of the corporation against the officers and directors but did not prosecute these claims. Mr. Koehler is now representing the officers and directors in defense of this action, in which the trustee is alleging that the officers and directors breached fiduciary duties owed to the corporation. I conclude that this situation creates an impermissible conflict of interest, and, consequently, Mr. Koehler should be disqualified. See Matter of Joy, 175 B.R. 303 (Bankr.D.Neb.1994).¹ I conclude this is an obvious conflict of interest that cannot be waived, and that Mr. Koehler should never have undertaken to represent the defendants herein. Not only does this conflict impair the judicial process, it is a disservice to Mr. Koehler's client in this case, who must now obtain new counsel. Because of this conflict, I conclude that Mr. Koehler should not be paid any compensation for legal services rendered and expenses incurred in connection with this adversary proceeding. Mr. Koehler shall be ordered to repay any compensation in regard to this adversary proceeding that has been previously received.

I conclude that Mr. Hahn should not be disqualified from representing the trustee for purposes of this adversary proceeding. Mr. Hahn is representing the trustee only in regard to this adversary proceeding. Although Mr. Hahn has previously represented, and continues to represent, unsecured creditors of the debtor, this dual representation does not present a conflict of interest. The trustee and the unsecured creditors have a community of interest in recovering funds for the benefit of creditors of the debtor. Furthermore, the fact that Mr. Hahn has been involved in litigation against the directors and officers involving the same operative facts and theories is cost-effective for the trustee and the bankruptcy estate.

Therefore, I conclude that Mr. Koehler should be disqualified from further representation in this adversary proceeding and the underlying bankruptcy case, but Mr. Hahn may continue to represent the trustee for purposes of this adversary proceeding.

Motion for Summary Judgment

The defendants assert two separate bases under Nebraska law for barring this action, § 21-20,104 and § 25-207. I conclude that § 21-20,104 is not applicable since the corporation has been revived. I also conclude that summary judgment should be denied under § 25-207 at this time, pending the opportunity for further discovery by the trustee.

Section 21-20,104

The first argument of the defendants is that the action of the trustee is barred by Nebraska Revised Statutes § 21-20,104 since it was not commenced within two years of when the corporation was dissolved, which was in April of 1990. I conclude that this is not the case. Section 21-20,104 is a survival statute, not a statute of limitations, and it allows a dissolved corporation to sue or be sued within two years of dissolution. McCormack v. Citibank, 241 Neb. 436, 489 N.W.2d 293, 297 (1992) (citations omitted); Neb.Rev.Stat. § 21-20,104 (Reissue 1991). However, when a corporation is revived and its good corporate standing is reinstated, § 21-20,137 of the Nebraska Revised Statutes provides that all matters based on actions that took place during or before dissolution are vested in the corporation upon revival as if no dissolution had occurred. Id. 489 N.W.2d at 296-98; Neb. Rev.Stat. § 21-20,137 (Reissue 1991).

In McCormack, a corporation was dissolved in April of 1987, and the complaint against the corporation was not filed until September of 1989, more than two years after dissolution. McCormack, 489 N.W.2d at 297. The corporation in McCormack was revived in October of 1989. Id. The Supreme Court of Nebraska held, based on § 21-20,104 and § 21-20,137, that the complaint against the corporation was not time barred since the corporation was revived and revested with its previous liabilities and rights. Id. 489 N.W.2d at 297-98. The same reasoning is applicable to the facts of this case, and the claim by the trustee should not be barred by § 21-20,104. Upon revival, Howe Grain, Inc. was revested with its rights against the former directors and officers of the corporation. Claims of the corporation against officers and directors constitute property of the bankruptcy estate and are vested in the Chapter 7 trustee.

Section 25-207

The second argument of defendants is that, even if § 21-20,104 does not apply to the facts of this case, the action of the trustee is barred by § 25-207, which is the Nebraska four year statute of limitations for general tort actions. Neb.Rev.Stat. § 25-207 (Reissue 1989). The parties agree that the actions of the directors and officers which form the basis of this litigation occurred prior to June of 1988, the time at which Howe Grain, Inc. ceased doing business. Furthermore, the defendants' actions were discovered by Mr. Hahn in 1988 by depositions taken of the directors and officers, and such information was conveyed immediately by Mr. Hahn to Mr. Koehler as counsel for the debtor-in-possession. Thus, the acts complained of occurred and were discovered by Mr. Hahn and Mr. Koehler more than four years before this case was commenced by the trustee in April of 1993. The trustee does not dispute the applicability of § 25-207. However, the trustee asserts that he was not appointed until October 15, 1991, and did not discover the actions of the directors or have authority to bring an action until that time. The trustee argues that, pursuant to § 108(a)(2) of...