Wasserstein v. 11 Apple LLC (In re WB Bridge Hotel LLC)

656 B.R. 733

IN RE: WB BRIDGE HOTEL LLC and 159 Broadway Member LLC, Debtors.

Nat Wasserstein, as Trustee of the WB Bridge Creditor Trust, Plaintiff, v. 11 Apple LLC, et al., Defendants.

Case No. 20-23288 (SHL) (Jointly Administered)

Case No. 20-23289 (SHL)

Adv. Pro. No. 22-07059 (SHL)

United States Bankruptcy Court, S.D. New York

Signed February 5, 2024

LEECH TISHMAN ROBINSON BROG, PLLC, Counsel to the WB Bridge Hotel LLC and 159 Broadway Member LLC, 875 Third Avenue, 9th Floor, New York, New York 10002, By: Fred B. Ringel, Esq., William A. Rome, Esq., Steven B. Eichel, Esq.

SILVERMANACAMPORA, Counsel to Nat Wasserstein, the Trustee of the WB Bridge Creditor Trust, 100 Jericho Quadrangle, Suite 300, Jericho, New York 11753, By: David J. Mahoney, Esq.

WILLIAM K. HARRINGTON, United States Trustee for Region 2, Alexander Hamilton Customs House, One Bowling Green, Room 534, New York, New York 10004, By: Andrea B. Schwartz, Esq.

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the question of whether a law firm that represented the Debtors in these Chapter 11 cases—up through and including confirmation—may now withdraw from that representation to represent the individual who managed the Debtors and who now is being sued by the trustee liquidating the Debtors' estates. This issue is raised in two pending motions. In the first motion, the law firm of Leech Tishman Robinson Brog, PLLC ("LTRB") filed the Motion to Withdraw as Counsel to the Post-Confirmation Debtors, WB Bridge Hotel LLC and 159 Broadway Member LLC. See ECF No. 190, Case No. 20-23288 (the "Withdrawal Motion"). Nat Wasserstein, the Trustee of the WB Bridge Creditor Trust ("Trustee") filed an objection to the Withdrawal Motion [ECF No. 192, Case No. 20-23288] (the "Withdrawal Opp.") and LTRB filed a response to the objection [ECF No. 198, Case No. 20-23288] (the "Withdrawal Reply"). In the second motion, the Trustee seeks to disqualify LTRB from representing that individual—and some of his entities—in an adversary proceeding filed by the Trustee, Wasserstein v. 11 Apple LLC et. al, Adv. Pro. No. 22-07059 (the "Adversary Pro."). See ECF No. 14, Adv. Pro. No.22-07059 (the "Disqualification Motion"). LTRB objected to the Disqualification Motion, [ECF No. 29, Adv. Pro. 22-07059] (the "Disqualification Opp.") and the Trustee filed a reply. [ECF No. 31, Adv. Pro. No. 22-07059] (the "Disqualification Reply").

The Court concludes that, while LTRB may withdraw from its representation of the Debtors in the main bankruptcy proceeding, it is ethically barred from its proposed representation of the defendants in the Adversary Proceeding as these matters substantially overlap with LTRB's prior representation of the Debtors. Accordingly, both the Withdrawal Motion and the Disqualification Motion are granted.

BACKGROUND

In late 2020, WB Bridge Hotel LLC ("WB Bridge") and 159 Broadway Member LLC ("159 Broadway," and together with WB Bridge, the "Debtors") filed voluntary petitions under Chapter 11 of the Bankruptcy Code. See ECF No. 1, Case No. 20-23288; ECF No. 1, Case No. 23289.¹ The Debtors' cases were jointly administered for procedural purposes only. See Order Directing Joint Administration of Chapter 11 Cases and Related Relief [ECF No. 12, Case No. 20-23288]. At the time of filing, Debtor 159 Broadway owned 100% of the membership interests in Debtor WB Bridge, and WB Bridge owned real property located at 159 Broadway, Brooklyn, New York. Declaration Pursuant to Local Rule 1007-2 ¶ 3 [ECF No. 20, Case No. 20-23288]. The Debtors were in the process of developing the real property owned by WB Bridge into a hotel but were unable to consensually restructure existing financial obligations. Id. ¶¶ 3, 4. When the secured lender of 159 Broadway scheduled a UCC sale of 159 Broadway's membership interests in WB Bridge, id. ¶ 4, the Debtors commenced these Chapter 11 cases "to preserve the assets of the Debtors for the benefit of their creditors and their estates." Id. Fred Ringel from the law firm of Robinson Brog Leinwand Greene Genovese & Gluck P.C. ("Robinson Brog") signed the bankruptcy petition of both WB Bridge and 159 Broadway as attorney for the Debtors. See ECF No. 1, Case No. 20-23288; ECF No. 1, Case No. 20-23289.

Consistent with Section 521(a)(1)(B) of the Bankruptcy Code, the Debtors filed schedules of assets and liabilities as well as statements of financial affairs ("SOFAs") shortly after commencing the cases. See ECF No. 19, Case No. 20-23288 (the "159 Broadway SOFA"); ECF No. 18, Case No. 20-23288 (the "WB Bridge SOFA"). In these filings, the Debtors listed, among other things, the Debtors' property as well as their creditors. In the SOFAs, the Debtors also identified their equity holders and answered certain questions about financial transactions. Id. Specifically, the 159 Broadway SOFA stated that Cornell 159 LLC owned 93.75% of the equity of 159 Broadway, and that Yitzchok Hager ("Mr. Hager") was the manager of 159 Broadway. See 159 Broadway SOFA. The Debtors' SOFAs also listed pre-petition transfers to insiders that occurred within one year of the petition date. See, e.g., id. Part 2 (identifying a payment of $238,000 to Cornell Realty Holdings LLC as a "reimbursement").

At the start of these cases, the Debtors filed an application to retain Robinson Brog as counsel. See Amended Debtors' Application for Authorization to Retain Counsel [ECF No. 43, Case No. 20-23288] (the "Robinson Brog Retention Application"). The services to be provided by Robinson Brog included, inter alia, "providing advice to the Debtors with respect to their powers and duties under the Bankruptcy Code in the continued operation of their business and the management of their property" and "assisting the Debtors in connection with all aspects of these [C]hapter 11 cases." Id. ¶ 11. In support of the application, Mr. Hager submitted a declaration stating that Cornell Realty Holdings LLC—of which Mr. Hager is the managing member—had paid $10,000 to Robinson Brog on behalf of the Debtors in connection with Robinson Brog's representation of the Debtors. See Amended Declaration of Isaac Hager ¶¶ 1-2 [ECF No. 43-3, Case No. 20-23288]. Mr. Hager further stated that he understood that Robinson Brog would only act as counsel to the Debtors in the bankruptcy case and that Robinson Brog's fiduciary duty was to the Debtors. Id. ¶ 4. In further support of the application, the Debtors filed an Amended Declaration of Fred Ringel [ECF No. 43-4, Case No. 20-23288] (the "Ringel Declaration"), wherein Mr. Ringel—a shareholder at Robinson Brog—affirmed that Robinson Brog does not represent any interest adverse to the Debtors and that Robinson Brog is a disinterested party as defined in Section 101(14) of the Bankruptcy Code.² Ringel Declaration ¶ 7. The Court granted the Robinson Brog Retention Application. See ECF No. 49, Case No. 20-23288.

Though Mr. Hager is not an equity holder of 159 Broadway, he appears to be in control of the Debtors through other entities. For example, the Debtors' books and records are held by Cornell Realty Management LLC, which has the same address that Mr. Hager lists for his address as manager of 159 Broadway. See 159 Broadway SOFA at Part 13, questions 26c.1, 28. Mr. Hager is also a co-obligor on 159 Broadway's secured debt. See Bankruptcy Petition, Schedule H [ECF No. 19, Case No. 20-23288]. Finally, Cornell Realty Holdings LLC paid the retainer to Debtors' counsel, with Mr. Hager being the manager of Cornell who submitted the declaration in connection with the Robinson Brog Retention Application.

After Robinson Brog's retention, the Debtors filed an Application for an Order Authorizing Employment and Retention of Leech Tishman Robinson Brog PLLC as Substitute Bankruptcy Counsel to the Debtors Effective as of May 15, 2022 [ECF No. 139, Case No. 20-23288] (the "LTRB Retention Application."). The LTRB Retention Application was prompted by Robinson Brog combining its practice with the firm Leech Tishman Fuscaldo & Lampl, LLC, with the resulting firm practicing under the name Leech Tishman Robinson Brog PLLC.³ LTRB Retention Application ¶ 3. The same team of attorneys continued to represent the Debtors despite the change in firm name. Id. ¶ 10. The LTRB Retention Application stated that LTRB would render services to the Debtors that included "providing advice to the Debtors with respect to its powers and duties under the Bankruptcy Code in the continued operation of their business and the management of their property" and "assisting the Debtors in connection with all aspects of these Chapter 11 cases." Id. ¶ 11. The LTRB Retention Application was granted. See ECF No. 150, Case No. 20-23288.

Ultimately, the Court confirmed a plan of reorganization that had been proposed by the secured creditor, 159 Broadway 1 LLC. See 159 Broadway 1 LLC's First Amended Plan of Liquidation [ECF No. 129, Case No. 20-23288] (the "Plan"); Order Confirming 159 Broadway 1 LLC's First Amended Chapter 11 Plan of Liquidation for the Debtor [ECF No. 160, Case No. 20-23288] (the "Confirmation Order"). The Plan provided, inter alia, that the property owned by WB Bridges would be sold and the proceeds from the sale distributed to creditors. See Plan § 6.1. The Plan also provided for the creation of a liquidating trust (the "WB Creditor Trust") for the benefit of Debtors' creditors and interest holders, with the WB Creditor Trust taking title to any claims or causes of actions, other than claims directly related to the property to be sold. Plan §§ 6.5, 7.1, 7.3. The Confirmation Order designated Nat Wasserstein as Trustee and the Trustee was vested with the "duty and authority" to maximize the value of these transferred claims. Id. § 7.5; Confirmation Order ¶ 21. The Plan became effective on November 16, 2022. See Notice of Effective Date of Plan [ECF No. 178, Case No. 20-23288].

After his appointment, the Trustee commenced a number of adversary proceedings to recover...