In re: Fundamental Long Term Care, Inc

Summarized by Bradley Pearce , Pearce Law PLLC
2 years 5 months ago

Case Type:

Business

Case Status:

Affirmed

Citation:

21-10587 (11th Circuit, Sep 18,2023) Published

Tag(s):

Ruling:

A lawyer is not disqualified from representing a bankruptcy trustee solely because the firm acted as outside general counsel to a company that had been voluntarily dismissed as a defendant from litigation brought by a creditor. Further, given the facts at hand, the lawyer's failure to disclose that representation was not negligent. Congress's use of the present tense in § 324 supported the bankruptcy court's conclusion that the alleged conflict was not impermissible.

Procedural context:

Several years after the trustee's special litigation counsel ("SLC") had withdrawn, a creditor moved to disqualify the SLC and force the SLC to disgorge nearly $6 million received in fees and expenses. The bankruptcy court denied the motion, concluding that SLC's failure to reveal that it acted as general counsel, but not litigation counsel, to a client that a creditor had sued was not intentional or material. On remand from the district court, the bankruptcy court concluded that SLC had not been negligent when omitting the representation from its original Rule 2014 disclosure. The creditor appealed to the district court, which affirmed. The creditor timely appealed to the Eleventh Circuit.

Facts:

In a case with bad acts, questionable litigation tactics, and litigation that spanned more than a decade, counsel for a dissatisfied creditor sought to recover nearly $6 million that had been paid to the bankruptcy trustee's special litigation counsel ("SLC"). The motivation of the objecting creditor ("OC") was to recover money that could be used to pay the OC and its attorney's contingency fees. The saga began before 2006. when two related companies, Trans Health, Inc. ("THI") and Trans Health Management, Inc. ("THMI"), were subject to more than 150 lawsuits. THI and its subsidiaries operated nursing homes. THMI provided management and other services to the THI nursing homes. THI was controlled by the GTCR Group. The GTCR Group rejected THI's and THMI's recommendations to file for bankruptcy in 2005. Instead, the GTCR Group orchestrated a "bust-out" that fraudulently transferred assets to one company, the debtor (Fundamental Long Term Care, Inc. ("FLTCH")), and left the liabilities in THMI. THI sold its stock in the now asset-less THMI to a company known as FLTCI. FLTCI's sole shareholder was an elderly graphic artist who did not know he owned FLTCI. After selling THI's assets, the GTCR Group had THI petition the Maryland state courts to appoint a receiver for THI and 143 subsidiaries, but not THMI. A consequence of getting a receiver appointed was to stay litigation and delay discovery that would reveal the fraudulent transfer. The GTCR Group then worked to conceal the fraudulent transfer. Among the methods used by the GTCR Group were (1) obtaining the right to defend THMI in the pending litigation and (2) the receiver's attempt to domesticate the receivership in Florida. The receiver instructed counsel defending THI and THMI in pending litigation to withdraw. The creditor's state-court case proceeded to trial, resulting in two $55 million judgments. The creditor's counsel sought to discover assets and collect on its judgment under post-judgment motions made under Florida Statute § 56.29. The parties who benefitted from the fraudulent transfers ("Targets") realized the error in deciding not to defend the state-court litigation. They entered into a settlement agreement with the receiver, paying $1 million into escrow to cover the receiver's legal costs. Meanwhile, the judgment creditor filed an involuntary chapter 7 petition against FLTCH, but not THMI, so that the judgment creditor's attorney could continue litigation involving THMI. A chapter 7 trustee was appointed and obtained court approval to hire special litigation counsel ("SLC"). The SLC's Rule 2014 disclosure failed to disclose that the SLC's firm acted as outside general counsel to a company ("Landlord") that a creditor had sued. The SLC's firm did not open a file for the litigation, did not represent the Landlord in the litigation, and appears to have taken no role in the Landlord's defense. Further, the Landlord was dismissed from the litigation because it only leased the property at which the wrongful acts allegedly occurred. About three years after being appointed as SLC, the SLC moved to withdraw from the case and to accept $5 million plus expenses as compensation. That motion was granted in 2015. In 2018, the creditor's counsel moved to disqualify the SLC and order the disgorgement of fees and expenses paid to the SLC. Creditor's counsel argued that disqualification and disgorgement were required due to SLC's failure to disclose its non-litigation representation of the Landlord.

Judge(s):

LAGOA, BRASHER, and TJOFLAT, Circuit Judges

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