Waldron v. Adams & Reese, L.L.P. (In re American International Refinery, Inc.)

Citation:
No. 11-30462 (5th Cir. March 2, 2012)
Tag(s):
Ruling:
The Fifth Circuit affirmed the lower courts' ruling that a law firm that failed to disclose prior transactional assistance to a debtor and was paid a retainer for bankruptcy representation through a loan from one of two major creditors did not have a disqualifying conflict of interest and thus was not required to disgorge legal fees. The court concluded that whether a third-party's payment of a law firm's retainer is a disqualifying interest should be decided by the totality of the circumstances test, rejecting the per se disqualification test used elsewhere. Applying that test, the court concluded that the evidence supported the legitimate inference that the law firm's desire to have the creditor's support of the proposed plan was a practical one, based upon the need for the creditor to support the plan. The court further held that there was no evidence that the law firm's decision not to dispute the creditor's secured claims was based upon loyalty to the creditor. Overall, the court determined that while certain of the law firm's actions appeared suspicious, the case did not present a totality of the circumstances egregious enough to create a disqualifying conflict. Regarding the firm's prior legal work, the court held that while "obviously not ideal or best practice," the record did not support a finding of a disqualifying conflict based upon the prior advice regarding the officer and director payments despite the firm's later decision not to challenge those payments. Finally, the court concluded that the law firm was properly sanctioned for not disclosing the source of its retainer and its previous relationship with the debtors and that the evidence did not support a conclusion of intentional nondisclosure.
Procedural context:
Liquidating trustee filed an adversary proceeding against the debtors' counsel for fraudulent and preferential transfers, disgorgement, and punitive damages. The case went to bench trial before the bankruptcy court on the disgorgement claim. The bankruptcy court held that the law firm did not have a disqualifying adverse interest but should be sanction $135,000 for failing to properly disclose its connections to the debtors and a major creditor. The trustee appealed.
Facts:
The debtors are a group of related companies. One debtor sold 80% of its interest in a Kazakhstan gas field for approximately $5 million. Much of the proceeds were used to pay back-wages and benefits to the debtor's officers. A major creditor, which was required to release its security interest in the asset sold was supposed to receive substitute collateral in the form of an assignment of dividends. The agreement was not executed prior to the closing of the sale. The debtors' law firm, Adams & Reese ("A&R") drafted the assignment agreement during pre-bankruptcy petition negotiations and advised the debtor on how to characterize the payments made to officers and directors with the sale proceeds. A&R never disclosed this drafting assignment to the bankruptcy court. A&R assisted the debtor in its restructuring and later that year was retained as bankruptcy counsel. The major creditor loaned one of the debtors $200,000 in exchange for a security interest in some real estate. The $200,000 was used to pay A&R's retainer. A&R's retention application to the bankruptcy court did not disclose the source of the retainer.
Judge(s):
The Honorable Fortunato Benavides, Carl Stewart, and James Graves, Jr.

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